Tuesday, January 03, 2006

Strong Up Day: What Next?

We rose strongly on Tuesday after dipping well below the day's open. Since January, 2003 (N = 752), we've had 26 days where SPY has risen more than 1.5%. The next day, the market has been up 17 times, down 9 for an average gain of .15%. This compares favorably with the average daily gain of .05% (416 up, 336 down) for the sample overall. Strong days that occur after an initial move down below the day's open tend to carry the next day strength over to the next several days. Strong days that occur after a five day period of weakness and that occur on above average volume also tend to follow through better. For all these reasons, Tuesday's strength has set up expectations of strength for the remainder of the week. In fact, when the previous five days have been down more than1% and the most recent day is up more than 1.5% (N = 11), the next day is up 9 times, down twice for an average gain of .63%. This is an example of high strength tending to follow through in the short run--a pattern that sustained the upturn through Tuesday afternoon.

4 comments:

Paulo de León said...

After a extreme low volatility we open the year with a day not seen in ndx in all 2005 i believe. I think no day with a move > 2% in NDX in either way in 2005.
The nasdaq is the market that needs to lead the rise in volatility to call the end of the cycle. A study of previous bottoms in volatility show that the bottom in volatility begins in ES and then confirmed in NQ 3-4 mths after on avg. with max difference 7 months. We are currently within those numbers.
The great question is the side of the move, up or down.

Brett Steenbarger, Ph.D. said...

Thanks; interesting observation. Basically, paper was poised to buy on the Fed indication of a coming end to the rate rising cycle, and that momentum should continue if history holds true. I'm agnostic as to whether Tuesday's move has any longer-term significance than that.

Greg Lepiaf said...

1- Brett, do I understant correctly that you use only Excel for developing the statistics your are presenting everyday or that you use for your trades ? So you download intraday data from your feed and do everything in Excel ? Not using the tools to evaluate strategies such the one provided in TradeStations and other softs. Is this for a historical reason or do you consider this is much more simple ?

2- As the research you provide is interesting it raises more questions such as : is it the same on other markets, european markets, asian markets or commodities, etc. Since every test takes some times. Would it be useful - and possible - if a few people would on a voluntary basis - test the same ideas on other situations and place the results here ? We would need to use the same procedure in order to be consistent, but I assume we would follow yours. Fell free to tell me this is not a good or practical idea !

Brett Steenbarger, Ph.D. said...

Hi,

All my data are archived in Excel, so it is easiest for me to do my simple analyses using Excel functions. I am not trying to develop mechanical trading strategies, so TradeStation is not necessary. I'm just looking for historical edges that can assist discretionary traders.

The idea of applying these analyses to other markets is fascinating; thanks for providing interesting food for thought. I would especially like to extend my analyses to individual equities once the writing of my new book is completed and I have more time. It would probably be easier for me to post those analyses myself rather than have others do them, since I already have the data archived and procedures in place.