Three Consecutive Days of Buying: What Happens Next?

We've had three consecutive days of strong buying, as shown by high readings of over +400 in the Adjusted NYSE TICK (quoted daily in the Trading Psychology Weblog). Since July 2003 (N = 750 trading days), we've had 24 similar occasions of strong buying for three straight days. On average, the next trading day in the S&P 500 Index (SPY) has risen by .32% (16 up, 8 down). That is considerably stronger than the average one-day gain of .03% (397 up, 353 down) for the sample overall.

Viewed differently, when the Adjusted TICK has averaged more than +500 per day over a three-day period (N = 47), the next three days in SPY have averaged an impressive gain of .46% (34 up, 13 down). That is much stronger than the average three-day gain of .09% (427 up, 323 down) for the entire sample.

As noted in the previous post, periods of very strong buying, as measured by the Adjusted TICK, tend to be followed by strength in the short run. We have had a solid burst of buying off the recent lows, kicked off by the Fed announcement. Such bursts, on average, have not quickly reversed themselves. I mentioned yesterday that we were not, as of that writing, at a point where we typically see positive momentum effects. With Monday's solid buying, that is no longer the case.