Daily Commentary - Posted on Wednesday, December 1, 2010, 8:51 AM GMT +1
SPX: 3 Consecutive Lower Open, Highs and Closes
On Tuesday, November 30, 2010, the S&P 500 posted a lower open, a lower high and a lower close the 3rd day in a row (in opposite to the SPY which closed higher last Monday).
Beside the fact that we’re entering into a favorable time frame for the markets (the first week of December, and December as well, see Seasonalities: The Market’s Performance in December), three consecutive lower open, lower highs and lower closes are indicative that selling pressure is regularly exhausted for the short-term, and probabilities and odds are (significantly) tilt in favor of at least one higher close over the course of the the following sessions.
Table I below shows all occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2 , 3 , 4 and 5 sessions, assumed one went long on close of a session where the S&P 500 has posted a lower open, a lower high and a lower close the 3rd day in a row in the past (the opening quotation for US major market indices is regularly a fake, but for statistical analysis – as a trigger only – it doesn’t matter, contrary to performance analysis concerning the open, or for trading purposes like entry / exits).
It is interesting to note that
- … the SPY closed higher on the then following session (like on Wednesday, December 1) on 2 out of every 3 occurrences (or 65.38% of the time) ;
- … the SPY closed above the trigger day’s close 1 or 2 sessions later on 3 out of every 4 occurrences (or 73.08% of the time) ;
- … the SPY posted at least one higher close above the trigger day’s close over the course of the then following 4 (and 5) sessions on 24 out of 26 occurrences (or 92.31% of the time) ;
- … the SPY never looked back and did not post a single close below the trigger day’s close over the course of the then following 5 sessions on 12 out of 26 occurrences (or almost 50% of the time) ;
- … downside potential over the course of the then following 5 sessions was regularly limited ; the SPY closed lower -1.0% (or worse) 5 sessions later on only 2 occurrences, but higher +1.0% (or better) on 14 occurrences.
From a statistical and historical point of view, after posting 3 consecutive lower open, lower highs and lower closes (concerning the S&P 500) probabilities (winning percentage) and odds (expectancy) are tilt in favor of higher prices over the course of the next couple of sessions.
Disclosure: No position in the securities mentioned in this post at time of writing.
Remarks: Due to their conceptual scope – and if not explicitely stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).
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