Selling On Strength Versus Weakness: Implications for Trade Execution

In the recent market, successful swing trading has pretty much amounted to the fading of market swings, particularly the fading of strength. Since 2007 (N = 524 trading days), the average three-day change in the S&P 500 Index (SPY) after a positive three-day period has been -.44% (122 up, 143 down). After a negative three-day period, the next three days in SPY have averaged a dip of only -.08% (144 up, 115 down).

Indeed, if we have made a three day closing high in SPY, the next three days have averaged a loss of -.64% (92 up, 107 down); across all other occasions, the average three-day change has been -.03% (174 up, 151 down).

When new 20-day highs across the NYSE, NASDAQ, and ASE have exceeded 1000, the next three days in SPY have averaged a loss of -.67% (59 up, 87 down). Across all other occasions, the average three-day change in SPY has been just -.10% (207 up, 171 down).

What this tells us is that much of the market weakness during the bear period has occurred following periods of strength. Selling on strength has provided far better returns than selling on weakness. The implications for executing trade ideas are significant.

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