- Posted by DynamicHedge on July 10th, 2015 at 2:31 pm
The market briefly closed below the 200-day moving average this week so let’s look at some recent history market behavior around the 200-day moving average.
If you took every trade (on the next open) after the $SPY closed below the 200-day moving average and held for a month, you would have a decent win ratio of 7 out of 9. Afterall, the last four years has been a pretty forgiving uptrend:
Digging a little deeper, we can see by looking at the Alpha Curves that the most dominant pattern (dark thick green line) is for the market to bounce right off the 200-day. The second most dominant pattern (light thick green line) is for continued selling pressure followed by a bounce after around 7-days (highlighted).
Alpha Curves use pattern recognition to track the path the market takes.
It’s quite clear from the big change in reward to risk ratio (3.6 vs over 20.6) that eliminating choppy volatile period after price closes below the 200-day MA break removes a lot of the risk.
This is not designed to be an exhaustive or comprehensive analysis of everything that happens around the 200-day moving average. However, it’s useful to know that there will likely be an increase in volatility around the 200-day moving average area so you can guard yourself against it in the future. This insight is only obvious because we can now do deep pattern recognition on the price data of different market scenarios.
To see more insight like this one and to analyze market behavior for yourself, check out Market Memory.
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Pardon the interruption
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DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More
- Quick observations on the 200-day moving average
- Momentum Mechanism
- How does Apple trade after earnings?
- 70 days of suffering in WalMart
- April is very bullish in a weird way
- Representativeness Bias: Easy Classifications
- Confirmation bias: A dependable filter of objective information
- Conservatism Bias: How to know what new information to focus on
- Sentiment Flip
- Pardon the interruption