Friday, March 03, 2006

Weak Opens: What Comes Next

When the market opened lower today, a couple of traders asked me, "How low do you think we could go?" As Ayn Rand would say, "Check your premises!" Does a down open usually lead to a down trading day?

I went back to March, 2003 (N = 757) and found 42 days in which we opened down more than half a percent in SPY (as we did today). From the open to the close, the market was up 22 times, down 20, for an average gain of .18%. That is better than the average open-to-close change of .02% (403 up, 354 down) for the sample overall.

When, however, the down open follows a day's trading session (previous open to close) that is weak, the average change from open to close is .32% (11 up, 10 down). When the down open follows a day's trading session that is strong, the average change from open to close is .03% (11 up, 10 down).

A down open after the previous day is weak is thus not more likely to be strong, but its gains are larger than its losses. Under no circumstances, however, could I find evidence that a down open produces subnormal market performance from open to close. It pays to check those premises!