Wednesday, September 09, 2009

A Further Look at Short-Term Stock Market Momentum

I recently took an initial look at stock momentum, finding that markets that finish the day strong (weak) tend to trade above (below) their day's high (low) the following session.

Here is another look at short-term momentum, drawing upon the Demand/Supply indicator mentioned in my previous post.

Going back to late 2002, when I first began collecting those data, if two conditions are met:

1) The most recent day has positive momentum (Demand exceeds Supply);

2) The most recent day has stronger momentum than the prior day (Today's Demand greater than yesterday's),

then we trade above the previous day's high in SPY approximately 60% of the time (vs 48% for all remaining days).

Adding a strength filter such as advance/decline strength improves these odds further. Interestingly, we don't see an edge on taking out yesterday's low when downside momentum is strong.

More on this topic to come; eventually, I'll be adding a Momentum System for swing trading to the
Transition System. Signals from both systems will appear on the blog and in Twitter updates (follow here) as a way to provide decision support for discretionary traders.


Joslin Lolo said...

hi Dr.Brett, can you please explain further your comment around advance/decline strength improving odds of hitting previous day hi? What specfic values are you refering to? Much appreiate further comment here...thanks!

Kevin said...

Hi Brett,

A lot of people are following this with great interest, myself included.

I've been thinking about the stats in one of your Sep 7 posts:

* About 56% of all weeks traded above the prior week's high; about 32% of weeks actually closed above the previous week's high;

* About 48% of all weeks traded below the prior week's low; about 22% of weeks actually closed below the previous week's low;

These numbers are close to 50:50 probabilities (e.g. when above the previous high there is a 32/56 chance of closing above = 57%).

It seems that the edge is in the size of the move (or risk reward) trapping long traders and declining into the range, rather than the posted probabilities.


Sean Rushforth said...

Hi, I’ve started to put together a few bits and pieces on spread betting if anybody is interested Trading Spreads any comment of feedback would be much appreciated

Sean :)