As you may know, the NASDAQ posted its 5th consecutive up-day yesterday. Earlier in the month, Rob Hanna over at the QuantifiableEdges blog put out an interesting piece after the index had put up a 4-day win streak.
He noted that this type of strength was not common when the index was trading below its 200-day moving average. The study he shared (which you can find in the link above) showed that the index was highly likely to close below Day 4's closing price at some point over the following week. A sign that such strength while under the 200-day would ultimately stall and offer a pullback.
Piggybacking on that idea, we ran a similar study that looked at how the index had performed since the 2009 market bottom after posting a 5-day win streak. We decided to remove the 200-day moving average filter so as to increase the sample size and doing so returned a total of 38 5-day win streaks since 2009. Overall, the results have an upside bias but what's interesting is looking at each year individually. 2009, 2010, 2012 and 2013 posted attractive returns over each of the time periods tested. For instance, 2010 and 2013 each offered nine 5-day win streaks which points to the idea that there were plenty of uptrends to be exploited in those environments, especially 2013.
Meanwhile, 2011, 2014 and 2015 offered far weaker performance over all timeframes as seen below.
The takeaway for us here is that we need to be looking for clues on what type of character the market is taking on.
Are we still in the difficult chop that dominated the back half of 2014 and all of 2015? If this is the case, traders must continue to operate in a defensive manner with shorter timeframes and holding periods and thus smaller profits. Or, are we reverting back to more of a trending, low volatility environment like we saw in 2013? In this type of scenario, it's more rewarding to buy strength, expand holding periods while seeking greater profit potential.
