Thursday, May 21, 2009

Two Days Down, Followed by a Down Open: Will Trend Be Your Friend?

We've already hit the S2 price target posted to Twitter prior to the market open in SPY following a downside reversal day, so things look pretty bleak for the day session.

Sometimes a look at the historical data can prevent traders from making hasty assumptions. When SPY has been down for two consecutive days since 2000 and then opens the next day lower, the day session averages a gain of .14% (105 up, 77 down). Across all other sessions, the day trade has averaged a loss of -.03% (1086 up, 1089 down).

It's not a wildly bullish edge, but neither is it a bearish one. It is easy to assume that the immediate past--especially when it's vivid--will carry over into the future. Markets don't always reward the easy assumption. Checking our assumptions--not getting locked into opinions in advance--is a useful psychological tool for active traders.