Tuesday, May 19, 2009

What Happens After Strong Upside Momentum Days in the Stock Market

Monday, we saw Demand--an index of the number of stocks closing above the volatility envelopes surrounding their short-term moving averages--exceed 190, while Supply (an index of those closing below their envelopes) was only 19.

Going back to late 2002, when I first began collecting these data, we've only had 31 days in which Demand has exceeded 180. That typically occurs after breakout moves, when many stocks display favorable upside momentum.

Interestingly, returns over the subsequent five days in the S&P 500 Index (SPY) have not been favorable. The average five-day change following a big upside momentum day has been -.82% (14 up, 17 down). Nor have returns been favorable 1-4 days out.

It appears that there has been no short-term bullish edge following large upside momentum days, with profit taking not uncommon.

Additional Comment 7 AM CT - I notice that the excellent Market Tells and Quantifiable Edges newsletters--both of which feature historical trading patterns--arrive at somewhat similar conclusions to the above, but each of them goes into more depth, with additional findings. Hats off to these worthwhile resources.

Note: Demand and Supply are proprietary measures; they're updated each morning prior to the open via Twitter (follow here).