Big Flip Flop In SPY - Could Be More Bearish Than Bullish In the Short Term 2-6-18

The recent weeks in stocks have been interesting, unique, and historically exceptional by many measures.  The last 3 days have been no different.

I ran a scan going back to 1995 looking for a similar sell off and rebound type pattern to what occurred over the last 3 sessions.  Here were the criteria:

• 3 days of successively increasing volume
• Today SPY closed up more than 1%
• Yesterday SPY closed down more than 1%
• 2 days ago SPY closed down more than 1%

Only 3 dates came up in the past 22 years.  And I have made notes of the outcomes.

10/23/2008 - Sharp sell off, closing low 2 days later, intraday low 2 days later

11/13/2008 - Sharp sell off, closing low 5 days later, intraday low 6 days later

12/4/2015 - Sharp sell off, closing low 5 days later, intraday low 6 days later

After the above sell offs and low, there were rebounds that were relatively sharp.  And yet none of them marked lasting lows over the coming months.

It may be hard to judge from just 3 instances, but the pattern was pretty consistent and may be one of the best comparisons to the recent sell off and rebound today.

I also looked at past instances of the following criteria which match the current market; this takes volume out of the equation but requires today be a lower low:

• Today made a lower low than yesterday
• Today SPY closed up more than 1%
• Yesterday SPY closed down more than 1%
• 2 days ago SPY closed down more than 1%

There were 17 instances, and over the next 3 days there was greater average MAX decline than MAX gain.  And notably 13 out of 17 instances closed lower the next day, with an average of 1.1% loss.

But at 10 days after the signal, 12 out of 17 closed higher, with an average gain of 2.7%

So now with the current data here a new pattern emerges when looking at the instances above....

There is more downside risk than upside potential over the next few days, and a probable brief retest of today's low, followed by a rebound for 1-2 weeks.

Interestingly, based on the past 17 instances in the second scan mentioned, the 4 instances that closed positive the next day, continued to maintain in positive territory for at least a week, and 3 out of the 4 never really looked back - they were spike low type situations.

So a positive close tomorrow would be suggestive of a rally that could continue to new highs in coming weeks, rather than the hard sell off to retest the lows that the top scan profiles.

Pete