Wednesday, January 04, 2006

Up Day After a Strong Momentum Day

Tuesday was a strong day and, as our analysis suggested, Wednesday followed through to the upside. One notable aspect of Tuesday's strength was a very high Demand/Supply ratio, as mentioned on the Trading Psychology Weblog. I went back to January, 2003 in SPY (N = 749) and investigated occasions when the following occurred: 1) the market was up strong (> 1%) with a strong Demand reading (> 140) and 2) the following day was up. The 14 occasions that met these criteria (matching the current market) were up 6 times, down 8 the next day, for an average gain of .18%. Three days out, however, they were up 9 times, down 5 for an average gain of .66%. While this offers no directional edge to tomorrow's trade, it does suggest continued upside potential in the short run thereafter.