Friday, July 17, 2009

Four Consecutive Day of Consistent Strength: What Has The Next Day Brought?

With the recent market rally, we have seen four consecutive days in the S&P 500 Index (SPY) in which we have had higher highs, higher lows, and higher closes. That is consistent strength.

Going back to 2000, we have had 39 such four-day periods of consistent strength. Interestingly, the next day in SPY has averaged a gain of .21% (22 up, 17 down). By contrast, the average next day change in SPY for the remainder of the sample has been -.01% (1174 up, 1177 down). While this is not a barnstorming edge to the upside, it certainly suggests that, over this time, there has been no bearish edge to selling into consistent strength.

I've noticed among traders a tendency to try to sell this rising market. Sometimes it's because the traders are locked into a negative longer-term market view; sometimes it's because they've missed the upside and now are looking to make up for it by calling the next turn. I find historical analyses such as the above a nice mental caution light that allows me to check my assumptions and expectations.


ex_wirehouse said...

Fantastic post, thanks. Seems like my worst days have been the occasions when I have fought this run up and sold strength. Lovey your posts, Jammed with info and right to the point.

Keep up the great work

MicroView said...

Given the size of the data sample (getting smaller and smaller), each case warrants careful examination IMHO. This week is OPEX week which is typical for MMs to run up the tapes following strong selling pressure during the past week. At the moment there is no strong flow pushing the market either way, so the MMs will do their best to cause the max pain in the market.

eagle said...

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procol said...

Yep. I find that when I'm fishing for places to get SHORT into a rising market, I'd be better off BUYING dips, oh, about 99 times out of 100.

Slow learner

. said...

From 13th July to 18th July Nifty Index was rising with full strength. But due to fear of falling i used to escape the trade with small profit. Again I enterd position and exited with small profit. This happened 3-4 times. The way i stuck to bear trap made me resist the rally (Bull run). Is it trader's ego?