Tuesday, June 26, 2007

Reverse Psychology in the Stock Market: Six Consecutive Lower Lows

I notice we've made six consecutive lower lows in the S&P 500 Index (SPY). That has only occurred on five other occasions since 2004. Five days later, the market was higher four of those five occasions, with three of the gains exceeding 1% and the one loss under half a percent.

If we loosen the criteria and examine all periods in which we've had 5 out of 6 days making lower price lows (N = 61), we find a similar bullish edge five days out. Specifically, SPY averaged a gain of .59% (44 up, 17 down).

I took the pattern all the way back to 2000, identifying all occasions when five out of six days in SPY made lower price lows (N = 165). Once again, we see a bullish edge five days out, with SPY averaging a gain of .84% (100 up, 65 down). By contrast, the rest of the occasions in the sample averaged a five day loss of -.03% (891 up, 814 down).

On a related note, I see that, as of Monday's close, we were down on a five, ten, and twenty day basis in SPY. That has occurred on 170 occasions between the start of 2004 and the end of May, 2007. Twenty days later, SPY has averaged a solid gain of 1.47% (124 up, 46 down). By contrast, the remainder of the occasions in the sample averaged a 20-day gain of .53% (440 up, 245 down).

Finally, I see that we made 751 new 65-day lows on Monday across the NYSE, NASDAQ, and ASE. As noted in the most recent entry on my Trader Performance Page, this pattern has had very bullish implications going 50 days out.

We'll want to see signs of selling drying up on Tuesday, with Monday's price lows holding, to aggressively act on these bullish historical patterns.


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Five Day Reversal Effects in the Market

The Market Is Rigged Against Human Nature