Thursday, February 09, 2006

QQQQ: Reversal Days and Changing Cycles

Thursday's NASDAQ Index (QQQQ) turned in a reversal day, opening near the day's highs and closing near the lows. It was also a relatively wide range day compared to recent action, with a range slightly over 1.8%. We closed about 1.6% off the day's highs and .20% off the lows.

I examined days since March, 2003 (N = 733) to identify past occasions when we've closed off the highs by more than 1.5% and off the lows by less than .30% (N = 66). Three days after these reversal days, the market was up by an average of .50% (38 up, 28 down), stronger than the .22% (416 up, 317 down) for the sample overall.

When I broke the sample in half based on time, however, a pattern emerged. From May, 2004 to the present (N = 33), the average three-day change following a reversal day was .08% (18 up, 15 down). From March, 2003 through April, 2004, the average three-day change was .91% (20 up, 13 down).

Interestingly, returns following the reversal day were superior when the prior day was weak rather than strong. Both of these patterns fail to provide us with favorable near term bullish edges and, indeed, suggest subnormal returns in the short run.