Wednesday, December 28, 2005

Inside Day After A Fall

Wednesday traded much more like a holiday session than Tuesday, remaining in a narrow range. After Tuesday's decline, Wednesday gave us an inside day. So, I decided to take a look at what happens after inside days that follow weakness vs. strength.

Since January, 2003 (N = 752), we've had 100 inside days. In general, returns following inside days are nothing to write home about. Two days later, the market (SPY) averages no change (47 up, 53 down), compared with a gain of .09% (402 up, 350 down) for the sample overall.

When the inside day follows strength (an up day; N = 50), the next two days in SPY average a loss of -.11% (23 up, 27 down). When the inside day follows weakness (a down day; N = 50), the next two days in SPY average a gain of .12% (24 up, 26 down). Interestingly, when the inside day follows a very weak session (down by more than 1%; N = 17), such as the present situation, the next two days average a gain of .40% (9 up, 8 down).

In general, inside days following strength tend to be weaker than inside days following weakness, but there are no decisive edges in the data. It's a bit like poker: knowing when you have a hand that gives you no real odds is not exciting, but--to a pro--it's information. In time you'll draw the nuts; mucking your hand when you have nothing helps you keep your winnings. Today we've drawn 4, 8 unsuited.