Monday, June 26, 2006

Double Inside Days

Thanks to a reader who suggested that I look at the phenomenon that we had as of Friday's close, in which Thursday and Friday's action were inside Wednesday's high and low. This double inside day represents a sizable short-term period of consolidation. Interestingly, the pattern has been bullish since 1990 and more specifically from 2004 to the present, where we see favorable returns five days out.

The important pattern, however, is that the double inside day appears to be bullish during bull markets and bearish during bear markets (as in 2000-2002). When you think about it, this makes some sense. By definition, a market's directional activity does not occur during consolidation periods. It's what happens afterward that sets the trend. A market tells you quite a bit by how it behaves in the face of consolidation. This itself might be a useful market indicator.

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