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.