Friday, May 15, 2009

The Value of Historical Market Analyses: Being Prepared and Being Confident

Past market behavior is no guarantee of the future, but sometimes it reveals a worthwhile edge. Prior to yesterday's market bounce, I posted a historical analysis that showed a tendency to move higher the day after a strong momentum day to the downside, followed by several days of follow through weakness. Looking at a different, but related pattern, Rob Hanna came to similar conclusions in his Quantifiable Edges blog. When you look at history in different ways and see common patterns, that is the time to entertain those patterns as active hypotheses in your planning for the trading day--especially when intraday patterns begin to confirm your hypotheses.

All of the historical patterns that I investigate simply involve a few basic manipulations in Excel. Alternatively, a subscription to a newsletter such as Quantifiable Edges allows analysts such as Rob to do the heavy data lifting for you. I see in the latest newsletter, Rob finds a challenging pattern: the market yesterday rose on good breadth but weak volume. He goes back into history and sorts out what we might expect going forward. I won't give away Rob's punch line; I'll just say that he's in the green this morning.

So much of being confident in trading boils down to being prepared.


Frankie said...

I'm confused by - or perhaps just disagree with - your conclusions related to Mr. Hanna's analysis and your own. Given that your blog entry was posted on Friday morning - "day 2" after the significant SPX drops - your analysis suggested that the posting day (Friday) and several days after it should show "further weakness". Mr. Hanna's analysis, on the other hand, concluded that Friday and the 8 trading days after it would be "strong". How one of these studies corroborates the other eludes me.

Brett Steenbarger, Ph.D. said...

Hi Frankie,

Sorry for lack of clarity on my part. My own work looked for strength the next day, weakness thereafter. After that strong day, Rob's newsletter noted a weak outlook after the up day on low volume. That was the corroboration I was referring to.