Monday, January 25, 2010

When Markets Are Weak, Should You Tweak?

I've commented recently on the topic of how what seems visually obvious--the continuation of short-term market trends--is not usually the obvious, winning trading strategy.

We registered over 2000 20-day lows on Friday across the NYSE, NASDAQ, and ASE, indicating broad market weakness.

Note, however, that we only registered a little over 300 fresh 65-day lows.

What that tells us is that, so far, we have a sharp decline in a rising market.

Going back to late 2002, when I first began compiling these data, we find only 23 days in which 20-day lows exceed 2000, but 65-day lows are below 1000. Over the following five trading sessions, the S&P 500 Index (SPY) has averaged a gain of .65% (15 up, 8 down). That compares with an average five-day gain of .10%.

These historical studies can provide a useful part of context for the trading day. More on that later.