A previous Market Pulse article ("Follow-through or fake-out: Testing 20-day highs and lows," April 2006) measured how the S&P 500 tracking stock (SPY) behaved after hitting 20-day highs and lows from 1993 to 2006. The study found the system was heavily influenced by the market’s upside bias. For instance, SPY climbed after hitting 20-day highs, but it also rebounded after dropping to 20-day lows.

However, the article raised more questions than it answered, especially since the S&P 500 index plunged 50 percent from Jan. 2 to Nov. 21 this year. In general, the stock market tends to bounce back after it declines, but in 2008 the market just kept falling. How do different conditions influence the market’s reaction to breakout signals?

This analysis compares SPY’s response to breakouts in bull and bear markets. It also tracks breakouts of different lengths — n-day breakouts from 10 to 100 days in length, in increments of 10.