Tuesday, April 11, 2006

Three-Day Broad Weakness: What Next?

Yesterday's Weblog entry noted that we were at a tipping point with stocks at multiweek lows; oil, gold, and interest rates at or near highs. Well, the market tipped as oil rose--and that puts us down 1.7% in SPY over a three-day period. So I decided to look at what happens after days like today, in which we're down more than 1% in SPY on a three-day basis, with total declines exceeding total advances by more than 4000 issues.

Interestingly, since March, 2003 (N = 779), we've only had 10 such occasions. It is also interesting that there is only a modest bullish bias to this small sample. Three days later, the market is up on average by .27% (6 up, 4 down). This compares to the average gain of .18% (457 up, 332 down) for the sample overall. The reason we're not getting more bullish readings is that broad market declines tend to continue in the near term before reversing. More in tonight's Weblog.


mike said...

agree on a broader decline and slower "closing" price reversal, but these types of environments usually leads to great intra day battles b/w bulls and bears which means bigger volatility....great for quick trades either long or short.

for tomorrow i'm expecting a morning down, then play the reversal to tonight's close, then maybe back down.

also, as the broader market declines, this may be simplistic on my part but i start looking at the general supports of 50dma's etc...

the nbi, just blew through their 200dma, and i've been picking up some stocks for long term holds. the ndx will probably hit at least 1690 tomorrow, which is my reversal target back to 1700 if we start out down tomorrow.


Brett Steenbarger, Ph.D. said...

Yes, good point: These large declines generally lead to a follow through in volatility, creating larger swings and better intraday trading opportunities. The key is volume and the relative presence of large traders in the market.