2004 or 2011

Posted on February 15, 2013 by Michael Harris, Price Action Lab Blog.

Unless there is a sell-off latter today, the S&P 500 will close up 7-weeks in a row. Since the start of 2000, there have been three 7-week winning streaks in  S&P 500, one in January 2011, another in May 2007 and one in January 2004, as I wrote in a recent post. Is the market going to behave like in 2011 or like in 2004?

The red arrows indicate short entry points at the close of a 7-week winning streak and the green arrows are the exit points for 8% profit target and stop-loss. The 2007 entry was close to the top of that year before the crash that followed and the 2011 entry before a significant correction. Both hit the 8% profit target of course. The 2004 entry generated a loss. As a matter of fact, historically and since 1960, shorting the market after a 7-week winning streak has been a losing startegy overall for profit target and stop-loss in the range 4% to 8% but that is expected due to the positive bias of the market. Below are the backtest results for 8% profit target and stop loss for a hypothetical position size of one share:

Shorting the market after the 7-week winnin streak has generated 7 winners and 10 losers since 1960.

Is it going to be like 2004 or 2011 this time around if the index finally closes up 7 weeks in a row? I am sorry I cannot provide the answer…