In a pre Bollinger Bands (BBs) era, the moving average envelope was used, to some degree, in a similar ways for technical analysis. Envelop is constructed by first calculating moving average and creating two copies of it – above and below the original, located at specified distance, which is in % terms. More on envelopes is here http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_envel
Today's topic of research will be rare events when price action actually touches or even crosses a big enough envelope on S&P 500 as well as Dow. The envelope in question is 200,20. Why 200,20? 200 is a popular average some traders use and it is slow enough for big events, 20% is so called standard definition of a Bull/Bear market move. Another fascinating reason why 200,20 was chosen specifically on $SPX will be revealed later.
( The following statement is quoted from the Ukrainian Wikipedia and has not been verified by FDA, FAA, FCC or FOMC and may not be kosher )
Rare and unforeseen events are typically called Black Swine Events. The legend says what in 18th century Eastern Europe everyone believed what pigs come only in pink/rosy color. Til russian explorer Ivan Susanin, while using his poorly constructed GPS, in 1612 lead polish troops in the swamp and discovered a Black Swine. People who saw only pink pigs never imagine a black one, so for them it was a rare and unforeseen event. Further popularized in the NY Times Bestseller "The Black Swine" by Nasheem Vasheem, where author discusses such rare events in a stock markets. "The Black Swine" is available at mAmaZone bookstore.
Let's construct our 200,20 envelopes (displayed in Blue) on daily S&P 500 & Dow.
Figure 1. SPX daily charts with 200,20 envelope ( in blue )
Figure 2. Dow daily charts with 200,20 envelope ( in blue )
Now let's see and review those rare events when price actually touches or even crosses outside of the envelope.
Table 1. Envelope hits & crosses since 1929 on Dow and 1950s on S&P to Present.
Another fascinating reason why 200,20 envelopes was chosen is it in 2008 crash SPX went not only below lower envelope band but the band was actually became resistance in November, January & February. That rare phenomenon was only observed on SPX and not on Dow.
oh, come on! we get about 20 events in 80 years - not so rare events! That's 1 event per 4 years on average! ( Damn 4 year cycle again! )
Ok ok! you're right, lets put a filter on...
So to summarize we found only one rare event when we repeatedly bounce from one band to the other to the other again.
Figure 3. S&P500 cash, linear scale, with envelopes December 2009
Super Bear Case
Wish you great and prosperous 2010!
Enjoy & good trading to you!
- Forkoholic Serge -
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