Shared conversation
SPY Trading Signal Analysis: Probability of a 3% Drop After Exceeding 20-Day SMA
Analysis of SPY's historical performance to determine the probability of a 3% drop in the following week after its price closes 1 or 2 standard deviations above its 20-day simple moving average (SMA), based on the past 5 years of data.
Read the conversation below. Open the interactive view for charts, attachments, and continuing this conversation.
Aurora
Hello. Would you like to create a new algorithmic trading strategy?
User
If SPY’s price is 1 standard deviation above its 20 day SMA, what is the probability it’ll fall 3% the following week?
Aurora
Here’s a summary of the results for your SPY signal analysis:
SPY: Probability of a 3%+ Drop After 1 StdDev Above 20-Day SMA
| Ticker | Total Signal Days | # Fell ≥3% Next Week | Probability of 3%+ Drop Next Week |
|---|---|---|---|
| SPY | 2,405 | 114 | 4.74% |
What does this mean?
- There were 2,405 instances where SPY closed at least 1 standard deviation above its 20-day simple moving average.
- Out of those, only 114 times did SPY fall by 3% or more over the following 7 calendar days.
- This results in a probability of about 4.74% that SPY will drop 3% or more in the week after such a strong signal.
Observations
Pros:
- The probability of a sharp drop (≥3%) after a strong upside move is relatively low, suggesting that such signals are not typically followed by large short-term declines.
- The sample size (2,405 signals) is robust, which adds confidence to the statistical result.
Cons:
- While the probability is low, it is not zero—meaning sharp reversals do happen, albeit infrequently.
- This analysis only considers one specific technical setup and does not account for broader market context, macroeconomic events, or other risk factors.
Unusual/Interesting Notes:
- The low probability may surprise some traders who expect “overbought” conditions to lead to frequent sharp pullbacks.
- The result highlights the importance of not assuming mean reversion will always occur quickly after strong upside moves.
Important Disclaimers
- As an AI, I strive to provide accurate and insightful analysis, but I can make mistakes and my results may not always reflect future market behavior.
- This analysis is based on historical data and a specific technical condition; market dynamics can change.
- Always double-check results and consult with a qualified financial advisor before making trading or investment decisions.
If you have more questions or want to explore other signals or timeframes, let me know!
User
If SPY’s price is 2 standard deviations above its 20 day SMA, what is the probability it’ll fall 3% the following week?
Aurora
Here’s a summary of the results for your SPY signal analysis:
SPY: Probability of a 3%+ Drop After 2 StdDev Above 20-Day SMA
| Ticker | Total Signal Days | # Fell ≥3% Next Week | Probability of 3%+ Drop Next Week |
|---|---|---|---|
| SPY | 249 | 11 | 4.42% |
What does this mean?
- There were 249 instances where SPY closed at least 2 standard deviations above its 20-day simple moving average.
- Out of those, only 11 times did SPY fall by 3% or more over the following 7 calendar days.
- This results in a probability of about 4.42% that SPY will drop 3% or more in the week after such a strong upside signal.
Observations
Pros:
- The probability of a sharp drop (≥3%) after a very strong upside move is quite low, suggesting that such “overbought” signals are rarely followed by large short-term declines.
- The result is based on a clear, quantifiable technical condition, which can help inform systematic trading strategies.
Cons:
- The sample size (249 signals) is much smaller than for less extreme signals, which may make the result less robust.
- This analysis only considers one specific technical setup and does not account for broader market context, macroeconomic events, or other risk factors.
Unusual/Interesting Notes:
- The probability of a 3%+ drop after a 2 standard deviation move (4.42%) is very similar to the probability after a 1 standard deviation move (previously found to be ~4.74%). This suggests that even more extreme “overbought” conditions do not meaningfully increase the risk of a sharp short-term reversal.
- Many traders expect mean reversion after extreme moves, but the data shows that sharp pullbacks are still quite rare.
Important Disclaimers
- As an AI, I strive to provide accurate and insightful analysis, but I can make mistakes and my results may not always reflect future market behavior.
- This analysis is based on historical data and a specific technical condition; market dynamics can change.
- Always double-check results and consult with a qualified financial advisor before making trading or investment decisions.
If you want to explore other signals, timeframes, or thresholds, just let me know!
User
Let’s recalculate both probabilities but limit our observations to the past 5 years
Aurora
Here’s a summary of the results for SPY’s probability of a 3%+ drop in the week following a close that is 1 or 2 standard deviations above its 20-day simple moving average (SMA), based on the past 5 years of data:
Probability of 3%+ Drop After SPY Closes Above 20-Day SMA
| Signal Type | Ticker | Total Signal Days | # Fell ≥3% Next Week | Probability of 3%+ Drop Next Week |
|---|---|---|---|---|
| 1 StdDev Above | SPY | 473 | 24 | 5.07% |
| 2 StdDev Above | SPY | 48 | 1 | 2.08% |
What does this mean?
- When SPY closes at least 1 standard deviation above its 20-day SMA, there were 473 such instances in the past 5 years. In only 24 of those did SPY fall by 3% or more over the following week—a probability of about 5.07%.
- When SPY closes at least 2 standard deviations above its 20-day SMA, there were 48 such instances, and only 1 resulted in a 3%+ drop the next week—a probability of about 2.08%.
Observations
Pros:
- Both probabilities are quite low, suggesting that even after strong upside moves (“overbought” conditions), sharp short-term pullbacks are rare.
- The 1 standard deviation signal has a slightly higher probability of a sharp drop than the 2 standard deviation signal, which may seem counterintuitive.
Cons:
- The sample size for the 2 standard deviation signal is small (only 48 events in 5 years), so the result may not be statistically robust.
- This analysis only considers one technical setup and does not account for broader market context, macroeconomic events, or other risk factors.
Unusual/Interesting Notes:
- The probability of a sharp drop actually decreases as the signal becomes more extreme (from 5.07% at 1 stddev to 2.08% at 2 stddev). This goes against the common expectation that “overbought” markets are more likely to experience sharp reversals.
- This result highlights that strong momentum in SPY is rarely followed by immediate, large pullbacks—even at extreme levels.
Important Disclaimers
- As an AI, I strive to provide accurate and insightful analysis, but I can make mistakes and my results may not always reflect future market behavior.
- This analysis is based on historical data and a specific technical condition; market dynamics can change.
- Always double-check results and consult with a qualified financial advisor before making trading or investment decisions.
If you’d like to see probabilities for other thresholds, timeframes, or different technical signals, just let me know!