Weaker on an Up Day: What Next?

Kudos to Rennie at Market Tells for pointing out that today's stock market was weaker than Friday despite the rise in the level of the large cap indexes. According to the data that I keep, which tracks all NYSE, NASDAQ, and ASE stocks, we made fewer 20-day highs today than on Friday.

So what happens after a weak up day in the market? I went back to late 2002 (when I first began collecting the 20-day high/low data) and looked at all cases in which SPY closed up on the day, but fewer stocks than the day previous made fresh 20-day highs.

Three days after the weak up day, SPY averaged a loss of -.25% (124 occurrences up, 133 down). For the remainder of the sample, SPY averaged a three-day gain of .07% (808 up, 638 down).

Interestingly, the weakness following a weak up day was more pronounced when the weak up day registered less than 500 new lows (as was the case today). That seems to suggest that a weak up day in a relatively strong market is particularly vulnerable to reversal, as a longer-term move may be waning. The average three day loss in SPY when new lows were low was -.41% (55 up, 63 down). When new lows were high, the average three-day loss was -.11% (69 up, 70 down).

It's a nice example of how looking at price change alone can mislead traders.
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