Monday, July 10, 2006

Down Day at the End of a Down Week: Changing Cycles?

Friday was a down day at the end of a five-day down period. What have been recent expectations after we've had a down session at the end of a down week?

Since 2004 (N = 628 trading days), we've had 142 down days at the end of down weeks. Four days later, the S&P 500 Index (SPY) has been up by an average .21% (85 up, 57 down). That is considerably stronger than the average four-day gain of .05% (259 up, 227 down) for the remainder of the sample.

Interestingly, however, during 2006 this pattern has not been profitable (N = 29). Four days after we've had a down day at the end of a down week, SPY has been down on average -.11% (16 up, 13 down).

This is but one example of how patterns that were showing up earlier in the bull market are not panning out well in the present environment. A similar shift of patterns occurred early in 2000 and was a helpful alert to a major change in trend.