Thursday, July 23, 2009

More on Time as a Market Indicator

A while back I noted that time itself can be viewed as a variable for evaluating historical trading patterns. On a short-term basis, time as an indicator can exploit those occasions in which it seems as though markets are rigged against human nature by giving reversal moves when we expect continuation.

Here's a starting point to consider and a pattern that may set up in coming days. Since 2000, when we have had only 1 or no five-day closing lows in SPY during the past 10 trading sessions, the next five days in SPY have averaged a loss of -.17% (363 occasions up, 363 down). When we have had five or more five-day closing lows in the past ten trading sessions, the next five days in SPY have averaged a gain of .33% (161 up, 145 down).

By the time we've made several closing five-day lows, the market is ready to bounce; by the time we've sustained strength for two weeks, we often see a correction.

Nice, but not a huge edge. If you go back to the post from Wednesday, you'll see how momentum is an important indicator in anticipating whether strength or weakness will continue or reverse. When we filter those time-based occasions by momentum, we have the start for a nice screen for likely market reversals.