Friday, December 30, 2005

Selloff In the Last Hour: What Next?

Once you develop a large, deep, and clean intraday database, historical analyses can be conducted on intraday patterns in real time. This allows quantitative traders to track shifting odds through the trading day. For example, you can look at what typically happens after the market opens up, but then retraces this rise in the first 15 minutes of trading. Or you could look at a day like Friday and ask, "What typically happens after the market sells off in the last hour and makes a new low for the day?"

It turns out that this has occurred 14 times in the past 250 trading sessions (which goes back to late December, 2004). After this selloff, the market (ES futures) has opened up the next day 6 times, opened down 6 times, and opened unchanged twice for an average gain of .07%. No real edge there.

By the end of the first hour of the next day of trading, however, the market has been up 11 times, down twice, and unchanged once for an average gain of .17%. This compares favorably to the average gain of .07% (141 up, 106 down, 3 unchanged) for the first hour of trade across the entire sample.

This bullish bias in the first hour of trade after a selloff dissipates through the remainder of the trading day (i.e., there is no edge holding on beyond that first hour).

In short, late selloffs have tended to be at least partially reversed during the first hour of trade the next day.

Once you start thinking of the morning, midday, and afternoon market hours as separate trading sessions, lots of intraday analyses become possible. A few are even meaningful... :-)