Bollinger Breadth Follow-Up

By -

Hello Slopers!

You may recall my previous post after the initiation stage of the Trump Rally here which was about a week after the election.  I shared the likelihood for forward trade was in a flat to up trend, but that there was a lesser chance of a large drawdown if price did reverse.  I have a little more context to it now so I thought I might show you what I’ve found.

161201 - SPY Drawdown Potential

It turns out that BOTH of the largest drawdowns occurred in the first month after QE1 and QE2 which means that both of these rallies ended with a rather broad testing of upper bollinger bands in the S&P500’s constituents before rolling over to die.  Of course, we’re not in a QE program now and I have to consider that this takes the chances of a large drawdown well off the table.  Also, It’s been 3.5 weeks since the Bollinger Signal which means we’re almost through the first month already.  Drawdowns when they occurred, tended to happen sooner rather than later so that’s another strike against a large selloff.

So what is most likely now?  Behold.

161201 - SPY Average Return

Here I have removed the largest four drawdowns (bolded in the first chart).  That means that 12 of the 16 occurrences since 2010 are in the chart above.  I averaged all of these into the bold black line.  Even from a quick eyeball, you can see there are maybe four trade sequences that  traded below the signal price so from these numbers anyways, there is still a 2/3rds historical probability that the signal initiation day’s price is not breached.

For SPY, that price is 216.38.  The high so far has been 221.63 or 2.4% above the signal day.  From the selections above, price would seem to be following one of the higher paths to already be at 2.4% at the end of month 1.

The way it looks to me, we need to be prepared for higher prices yet.

Good luck out there!