Stocks, commodities, and currencies: member-only studies for October 2018


Here are the member-only market studies for stocks, commodities, and currencies. We add new studies to this list once every few days.
Let’s analyze the stock market’s price action by objectively quantifying technical analysis. For the sake of reference, here’s the random probability of the U.S. stock market going up on any given day, week, or month.

*Probability ≠ certainty. But if you consistently trade against probability, then you will underperform in the long run.

NASDAQ’s late-cycle behavior (October 29)

The S&P made a pretty big “outside day“. Far from being bearish, this is actually more bullish.

Like the S&P, the NASDAQ also made a big “outside day”.

The NASDAQ’s outside day wasn’t as big as the S&P 500’s outside day. Moreover, outside days seem to be more common for the NASDAQ than for the S&P.
Here’s what happens to the NASDAQ (historically) when its HIGH today was more than 1.6% above yesterday’s CLOSE, and today’s CLOSE was more than 1.6% below yesterday’s CLOSE.
Data is from 1971 – present.

As you can see, pretty bearish on every single time frame. However, it’s worth noting that a lot of the cases are overlaps of each other, from March 2000 – October 2001.
I wouldn’t see this as a medium term bullish or bearish sign. But at the very least, this certainly is a sign of late-cycle behavior. This only happened in the late-1990s and during previous bear markets.

Dow fell really quickly (October 29)

The U.S. stock market has fallen really quickly. The S&P fell more than -9% from an all-time high in less than 30 days. Historically, this led to a bounce in the S&P 500 over th next 1-2 weeks.

The Dow has also fallen really quickly. It has fallen more than -8.5% from an all-time high in less than 30 days.
Here’s what happens next to the Dow when it falls more than -8.5% in less than 30 days. As you can see, the Dow also tends to make a 1-2 week bounce, after which forward returns are more random.

It’s also worth noting that there were a lot more bearish cases pre-1929 than post-1929. This is because for much of the early 20th century the U.S. stock market swung sideways in a big range.

Russell 2000 down a lot (October 29)

The Russell 2000 has been much weaker than the S&P 500.

The Russell has fallen 29 out of the past 42 trading days. This is uncommon.
Here are the historical cases in which the Russell 2000 fell at least 29 out of the past 42 trading days, and what it did next.

Seems pretty bullish over the next 1 year. This is a sign of extreme selling in small caps.

Medium Term Volatility Model for individual sectors (October 28)

Today’s member-only market studies are going to be a little different. We’re going to look at the Medium Term Volatility Model applied for individual stock sectors and indices.
Remember: volatility is mean reverting and moves in the opposite direction of the S&P 500.
For reference, here’s the S&P 500’s Medium Term Volatility right now. It is extremely high.

Here’s Medium Term Volatility for the NASDAQ Composite right now
Notice how it is high, but not as high as the S&P 500’s

Here’s Medium Term Volatility for the Russell 2000 right now

Here’s Medium Term Volatility for the Dow Jones Industrial Average right now

Here’s Medium Term Volatility for XLU right now
XLU’s volatility isn’t very high.
You can see that XLU is very interesting. This sector seems to be very cyclical. When XLU’s volatility becomes very low, it’s a nice setup for a short term decline in the overall stock market.

XLE (October 24, 2018)

The stock market’s energy sector is extremely oversold. XLE (energy sector ETF’s) 14 day RSI is now below 20.
From 1998 – present, there have only been 4 other cases with such low RSI readings.

When XLE’s RSI was this low, it could go lower in the short term (i.e. 1 week later), but always made a bounce 1 month later.

Russell 2000 (October 24, 2018)

The Russell 2000 is now more than -11% below its 50 day moving average. In other words, a very rapid decline.

Historically, this led to more selling in the small caps over the next 1-2 weeks. Small caps can at times significantly diverge from the broader S&P 500.

NASDAQ (October 24, 2018)

The NASDAQ Composite is now more than -9% below its 50 day moving average. In other words, a very rapid decline.

Historically, this led to more selling in tech over the next 1-2 weeks. Tech can at times significantly diverge from the broader S&P 500.

AUDUSD (October 22, 2018)

The Australian Dollar has been in a long and steady downtrend. It has remained below its 50 day moving average for more than 93 trading days.

Here’s what happens next to AUDUSD when it remains below its 50 day moving average for 93 consecutive days.

As you can see, the Australian Dollar tends to make a short term bounce, after which the medium term and long term outlook is mixed.
*This data is from 1983 – present.

XLF vs. S&P 500 (October 22, 2018)

XLF (finance sector ETF) has underperformed the S&P badly this year. XLF has now fallen to a 10 month low, while the S&P is still 6.7% above its lowest price in the past 10 months.

Here are historical cases in which XLF was at a 10 month low while the S&P was still more than 5% above its lowest level in the past 10 months.

  1. October 22, 2018
  2. January 20, 2009
  3. June 9, 2008
  4. November 5, 2007
  5. July 26, 2007
  6. February 18, 2000



The data is limited from 1998 – present, so take this study with a grain of salt. But either way, I see this as a sign of late-cycle behavior. The bull market certainly doesn’t have a lot of room left.

WTI oil (October 22, 2018)

Even though oil prices have fallen a little recently, they have overall remained in an uptrend. WTI oil has been above its 200 day moving average for 261 consecutive trading days.

From 1983 – present, such long streaks above the 200 dma are rare. In fact, they have only happened 2 other times.

  1. May 23, 2008
  2. March 21, 2000


Oil might not go down in the short term, but “eventually” such long streaks ended. This certainly is not a long term bullish sign for oil.

Rising USD:S&P ratio (October 11, 2018)

The USD Index : S&P 500 ratio has been rising. The ratio’s 14 daily RSI has exceeded 78.
Historically, this was short-medium term bullish for the U.S. Dollar Index

8 comments add yours

    • Hi Sean,
      I have tried various combinations. But the problem with all non-U.S. markets is that their impacted by their own price AND the U.S. stock market. Being the big whale in the ocean, if the U.S. stock market tanks, it brings everyone else down.
      For the long term, I found this interesting
      https://bullmarkets.co/trading-model-australia/

          • Hi Troy,
            Are you able to give updated weekly signals for the All Ords for members?
            Medium/long term as in US.
            (e.g. Members should be 70% long.)
            thanks
            Brian
            Australia

          • Hi Brian,
            The Medium-Long Term Model is only for the U.S. stock market. The data isn’t for the Australian stock market.
            However, the long term movements of the Australian and U.S. stock markets are mostly in line.
            Hence, predicting a bear market or “big correction” for the U.S. = to approximately the same thing for Australia

  1. Thanks for always good analyzes, Troy.
    I would like to understand the connection between the major markets, ie US, Asia and Europe.
    Every morning I read in the news that the European (I live in Denmark) market is expected to fall or rise. And it is always based on the fact that the US has fallen / increased the day before, Asia is following, and so does Europe (and Denmark).
    But is that really the truth? Will yesterday’s 3 percent fall in the US also cause a 3 percent decline in Europe, or can we find patterns that show that, in certain circumstances, the US does not affect Europe 1-to-1? If we can find the patterns/circumstances, it is a powerful tool to predict a fluctuation, in advance.

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