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.

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](https://nexustrade.io/stock/SPY) | 2,405 | 114 | 4.74% | #### What does this mean? - There were 2,405 instances where [SPY](https://nexustrade.io/stock/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 con…

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](https://nexustrade.io/stock/SPY) | 249 | 11 | 4.42% | #### What does this mean? - There were 249 instances where [SPY](https://nexustrade.io/stock/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 sign…

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](https://nexustrade.io/stock/SPY) | 473 | 24 | 5.07% | | 2 StdDev Above| [SPY](https://nexustrade.io/stock/SPY) | 48 | 1 | 2.08% | --- #### What does this mean? - When [SPY](https://nexustrade.io/stock/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%**. --- ### O…