What are odds of a SP500 reversal?

The SP-500 has corrected 4.35% from its recent high achieved a couple of days after our repeated warnings of high correction risks. The question that naturally comes to mind now, as we embark on this corrective phase, is what the odds of the worst being over are.

We have been working on a statistical model for launch in July but due to the topical nature of this question, we thought we would reveal what the current version of the model is saying. The statistical model leans off daily closing price data for the SP-500 since 1963 and works off short, medium and long term corrective phases taken over 10, 60 and 240 trading sessions respectively. It then examines how much we have currently corrected over these respective periods and what percentage of the respective historical samples led to the corrections becoming worse. The inverse of this percentage can then imply the statistical probability of the correction being over.

It sounds ridiculously simple and is a work in progress, as we are combining with other factors such as duration of correction and so forth, but it is proving useful nonetheless in assessing short, medium and longer term trading or entry risk over the long term history. The idea is that it is used in conjunction with our other trough-detection models such as Great Trough Detector (GTR) etc.

Anyhow here is the latest reading where the odds of a short term bottom are just shy of 90% whilst the odds of a medium term bottom being witnessed are just shy of two-thirds and a longer-term bottom only at 52.1% Ideally we want all three these figures North of 80% or even 90% to keep the odds in our favor but the longer-term corrections visit these levels far less frequently so short term traders will be more aggressive in their use of the short-term probabilities.

Whilst we are on this topic, note that GTR is now flirting with deep trough territory (but that could change intraday):

Also the Selling Pressure Diffusion Index is on a heady reading of 6:

Finally, the Net-new-highs which gave timely warnings is on zero and a rise above 0 signals a BUY (slower than the other models but still useful):

So we sit and wait…

About Dwaine Van Vuuren

Dwaine has a Bachelor of Science honors degree and is a full-time trader and investor. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT into a company used by hundreds of hedge funds, brokerage firms and financial advisers around the world.

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