On Monday we looked at 3-day momentum in the S&P 500 and its implications for the next three days. Now we'll do the same for the NASDAQ 100 Index (QQQQ) and the S&P 400 Midcap Index (MDY).
Once again, we're investigating July, 2003 through November, 2005 (N = 616 trading days). When the three-day price change in QQQQ is > 2.1% (N = 80), the next three days on average are up .48% (53 up, 27 down). When the three-day price change in QQQQ is < -1.7% (N = 81), the next three days on average are up .40% (46 up, 34 down). Interestingly--as with SPY--when three-day momentum in QQQQ was moderate (N = 455), the next three days average only .07% (245 up, 210 down). Looking at MDY, when three-day price change is > 1.9% (N = 78), the next three days in MDY average .25% (49 up, 29 down). When three-day price change < -1.45% (N = 81), the next three days in MDY are up .54% (53 up, 28 down). When MDY displays a moderate price change over three days, the next three days average only .16% (264 up, 192 down).
Again, these findings suggest that much of the upside action since 2003 is momentum related, following periods of very strong and very weak price momentum. Let's add this to our stable of market patterns providing a potential trading edge.