Friday, December 23, 2005

Four Consecutive Up Days - What Next?

We've had four consecutive up days in SPY, but that's not the most unique feature of recent action. Rather, of the 66 instances of four consecutive days that we've had since 2003 (N = 748), this most recent episode is the weakest of all in terms of percentage price change. On average, when we have four consecutive up days in SPY, the average price change is 2.61%. The past four days, we've seen a rise of only .84%.

In general, there is no edge over the next four days when we look at four consecutive up days in SPY. The average four-day change for the sample overall (N = 748) is .18% (424 up, 324 down). After four up days, the average four-day change is .13% (40 up, 26 down).

When we perform a median split on the sample of consecutive four-day rises, however, a pattern emerges. The strongest four-day periods in the sample (average price change = 3.5%; N = 33) average .32% over the next four days (22 up, 11 down). The weakest four-day periods in the sample (average price change = 1.72%; N = 33) average -.05% over the next four days (18 up, 15 down).

What we see, then, is a momentum effect: Four consecutive rises that produce a strong price gain show some upside continuation over the next four days. There is no such upside continuation when the four consecutive rises do not produce strong price change, such as has been the case over the last four days. This does not provide us an edge to the downside; rather, it suggests that there is no significant upside edge despite the short-term uptrend.

4 comments:

Lynn H said...

Could you give me a quick definition of median split in your look-back analysis process. Thanks Lynn

Brett Steenbarger, Ph.D. said...

A median split is a comparison of half a data set vs. the other half. So, for example, in a sample of 100 days, I might compare the 50 strongest days with the 50 weakest days.

Brett

D TradeIdeas said...

Nice work. If one believes the initial 4 up day growth trend will lead to a continued momentum, then the following scans can help do one's homework:

4 Up Days

In the words of someone else
s tagline: We can only report, a trader still needs to decide. Your analysis helps.

Brett Steenbarger, Ph.D. said...

Very interesting, David. Once you use research to identify a historical pattern with an edge, a scanning program such as Trade Ideas can help identify occurrences of the pattern in real time and among multiple trading instruments.

The need for traders to decide even after a potential edge is reported is crucial. I would never trade any of these patterns unless I saw real time action in the market supporting the basic trade idea. It's when the pattern forecasts strength *and* you see selling drying up in real time, for example, that you can have high confidence in going long.