Daily Commentary - Posted on Thursday, April 2, 2009, 12:01 PM GMT +1

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Apr Thursday 2

Recovery Days and Happy End(s) ?

Recovery Days and Happy End(s)

On Wednesday, April 1, the market (SPY as a proxy) opened -1.24% lower, but closed on a very strong note +1.94% on the day.

Rob Hanna at Quantifiable Edges posted an interesting study concerning the markets (S&P 500) behavior over the course of the following 10 sessions buying on close any time the S&P closes over 1% below its high for the day but still positive (like Tuesday’s session). His bottom line (and I totally agree) is that many market participants interpret the inability of the market to hold on to its gains as a potential negative (bearish) sign, but market history tells otherwise.

I thought it would be interesting as well to inspect the markets (SPY) behavior after recovery days (lower open, higher close) like Wednesday’s session over the course of the following 10 sessions buying on close any time the SPY opens at least -0.50% lower, but closes up  more than +0.50% on the day (in order to increase the sample size I lowered the bar a bit)., closing the trade on close of the session x days later. Although the sample size is still small (15 occurrences), since 10/01/2007 the market shows a clear tendency of some follow-through of the trigger day’s strength (Wednesday’s session) on the day immediately following the trigger day (would be today’s session, 10 winner, 5 looser and an above-average profit factor greater than 1), but to reverse course over the next couple of sessions turning negative from the 2nd day onward with some exceptional weakness especially on day 4 and 5 after the signal was triggered (limited upside potential, 5 winner versus 10 looser, the average winning trader smaller than the average loosing trade and a profit factor significantly below 1 for an overall considerably negative expectancy almost always below the respective at-any-time profit factor).

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(click on image to enlarge)

Even the time frame since 01/03/1995 shows comparable tendencies -but to a lesser extend- , positive on the session immediately following the trigger day, turning  slightly negative short term from the 2nd day onward (at least until day 5).

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(click on image to enlarge)

Successful trading,

Frank

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