Monday, November 10, 2014

What Happens After SPX Streaks Above its 5-dma For 16 days?

SPX is currently adding to a 16 day streak of closes over its 5-dma. Since 1996, this has happened just 6 other times. It's a small sample but let's take a look at what happened next.

Most recently, SPX had similar streaks in July 2013 and August 2014. These may be the most relevant examples as both followed short falls in SPX and were part of a "-v-shaped" bounce.

The August 2014 streak marked the top; the July 2013 streak continued 1% higher. Both gave back all their gains and more in the weeks ahead.

There hadn't been a long streak like this since January 2004. Recall, the prior bear market finally ended in March of 2003. This was part of the initial leg higher. In fact, it was the end of that leg, as SPX traded 3% higher before entering a long, choppy period that lasted all of the next year.

There were two long streaks in 1998. The first was in February and followed a 6 month period of chop which shook out many bulls. The subsequent win streak was the initial up leg, and it continued another 15% higher.

The second streak (in July) came at the end of that up leg, and it marked the top within 2%. A severe drop followed. Like the streak that started in February, the one in July also followed a multi-month period of consolidation, making both of these unlike today.

Finally, the impressive bull run of 1995 (which is so similar to 2013) ended with a 21 day streak where SPX closed above its 5-dma every day. That streak is the longest in our sample and the high was 2% above the close on day 16. It marked the high for the following 3 months of choppy trading. SPX was still lower 9 months later.

Again, it's a small sample, so careful reading too much into these examples. While SPX usually made a higher high ahead (5 out of 6 times), SPX usually traded lower in the weeks ahead (5 out of 6 times). The forward results were not impressive. February 1998 is a clear outlier; it traded much higher but also immediately followed the longest bull shake out in our sample.

Note that the seasonally strong period from November to April features in 4 of the situations presented above. Seasonality is a tailwind now, but that doesn't preclude periods of chop and whiplash.

Our weekend summary looked at recent long streaks above the 5-dma; in most cases, when the streak ended, a buy off the first touch of the 13-ema (arrow) led to at least a retest of the recent high (read the post here). That's our current expectation now as well.

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