Saturday, September 12, 2009

More on Short-Term Stock Market Momentum

I recently posted an initial look at momentum in the stock market, drawing upon weekly data. This further look makes use of daily data.

Going back to 2000 in the S&P 500 Index (SPY), when the number of advancing stocks on the NYSE minus the number of declining stocks amounts to 20% or more of the issues traded, then we have taken out the current day's high price on the next trading day 69% of the time. Conversely, when we've seen such advance/decline strength on the day, we've taken out the current day's low on the next day only 26% of the time.

When the number of number of declining stocks minus the number of advancers amounts to 20% or more of the issues traded, then we have taken out the current day's high price on the next trading day only 29% of the time. But when we've seen such advance/decline weakness on the day, we've taken out the current day's low on the next day 66% of the time.

Also going back to 2000, if the current day closes above its pivot price level, the next day in SPY has taken out its prior day's high 68% of the time. It has taken out its prior day's low only 32% of the time.

If the current day closes below its pivot price, the next day in SPY has taken out its prior day's high only 31% of the time, but has taken out the previous day's low 67% of the time.

What we see is that strength and weakness tends to carry over to the next day's trade, though not necessarily to the next day's close. (See here for more on that dynamic).
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