Are IBD Follow Through Days After Day 10 Less Reliable?

One of the interesting claims that William O’Neil make about Follow Through Days is that they are less likely to work if they come more than 10 days from the potential market bottom. As part of the study on Follow through Days, I decided to test this. Those who missed the first several installments of this study may want to click on the “IBD Follow Through Day” label lower down on the right hand side of the page. This will be the 9th installment in the series.

Using the original basic assumptions of an 8% decline needed and a 1% up move on the Follow Through Day (as opposed to the current 1.7% requirement that I found to be less effective), I reviewed all FTD’s listed in the study.

A Follow Through Day actually occurring after day 10 was a fairly unusual occurrence. Downtrends and bottom formations typically carry significant volatility, so a strong, high-volume move off a low normally occurs before day 10.

Of the 65 FTD’s listed in the study, only 8 of them occurred on day 10 or later. They are listed below along with the FTD Day # and whether they were “successful” or not. (Success was defined in Part 1 – Are They Predictive?)

Seven of the eight FTD’s that came after day 10 were successful according the study. While the sample size may be too small to claim significance, there certainly seems to be no credence to the claim that FTD’s after Day 10 are LESS reliable. In fact, the opposite appears true. Seven out of eight seems especially impressive considering the fact that only 55% of the FTD’s in the study were successful. I suspect one reason for this may be that the delayed FTD allows stocks more time to carve out proper basing formations before the market attempts to launch higher. In light of the facts, it seems a curious claim for IBD to make.

The takeaway here is: next time a follow through day doesn’t come immediately, traders shouldn’t fret. The chance of success is likely higher.

VIX System Discussion Follow-up

After my VIX post a couple of days ago, “Frank” made some interesting comments in the comment section. He duplicated part of the system I discussed, but his results were very different. Using a 15% VIX stretch (a close 15% above the 10ma) he found 17 of 18 short trades since 2004 to be winners if you wait for a reversion to the 10ma to exit.

The big differences sparked some good conversation over at the Daily Options Report, which has picked up on this study. So I felt I should clear up a few things.

1) I mistyped in my post. Options were not used in my testing – futures were.

2) My “system” looked at several measures of overbought/oversold – it generally entered if more than one triggered and exited when the triggers were removed. The 15% VIX stretch was one example.

3) I did not scale in. If a trigger occurred, the system was basically “all in”. I’m sure scaling as Frank did, would help.

4) I don’t think 1, 2, or 3 above really matter much. Looking back to the beginning of 2004 I did a quick count of the number of days that the VIX closed at least 15% above its 10ma. I counted about 70 times. Frank only found 18 times. I suspect Frank was looking for a 15% stretch in the futures. I was looking for a 15% stretch in the actual VIX.

My point was to show that the futures and options could not be easily traded based on the action of the VIX alone. A stretch in the futures successfully reverting to its mean doesn’t surprise me. I’ll bet in many of those 18 cases the VIX index would have put the system into the trade even earlier and at a worse price – turning several of Frank’s winners into losers.

To sum up – the VIX is not tradable. Buying calls or puts based on VIX action as I’ve seen suggested in the media looks good on the surface but is a horrible strategy. Frank has generously shown that astute traders CAN successfully trade VIX futures by focusing on VIX futures action.
Below is a chart of the VIX(green) and front month VIX futures (orange). The chart is a few months old because I don’t have my futures data fully updated (I don’t trade it). The takeaway from this chart is that sharp moves in the VIX “cash” index are dulled in the futures. Note how while they generally move in the same direction, the cash VIX will oscillate around the futures. If you look at futures further out than front month, this “dulling” of the VIX moves by the futures will be even more pronounced.

The Intermediate Term Significance Of A Lagging Nasdaq

One indicator I look at comes from Gerald Appel’s book “Technical Analysis – Power Tools For Active Investors”. It is a relative strength measure of the NYSE vs. the Nasdaq looked at on a weekly chart. Without going into great detail, the premise behind the indicator is that the market tends to perform better when the appetite for Nasdaq stocks is greater than the appetite for NYSE stocks.

Part of this is due to the higher volatility of the Nasdaq, and part of it is due to investors willingness to speculate more aggressively when their outlook is positive. Whatever the reasons behind it, the indicator has been a pretty good barometer over the years. Mr. Appel suggests using a 10-week relative strength indicator to measure this phenomenon. This is what I’ve done in the chart below. The way the indicator works is as follows: When the red line is above the yellow line, the Nasdaq is leading the NYSE. When the red line is below the yellow line, the Nasdaq is lagging the NYSE. (Click to enlarge).



Since 1971, close to 100% of the market’s gains have occurred when the Nasdaq is leading rather than lagging. As you can see from the chart above, the Nasdaq has begun to lag badly. I decided to look and see how the market has performed under similar conditions in the past.

Using the NYSE composite as the “tradable” vehicle, I set up the following rules: 1) The NYSE must make a new 5-week high this week. 2) The current NYSE/Nasdaq ratio must be at least 3.0% below the 10-week EMA. (The red line must be 3.0% or more below the yellow line.) 3) The difference between the current NYSE/Nasdaq ratio and the 10-week EMA must be at it’s widest point in the last 5 weeks. (The red line must be farther below the yellow line than it has been in at least 5 weeks.)

If all three conditions are met, sell the market short on the close. Cover X weeks later. Results below:

As you can see, a Nasdaq lagging as badly as it is right now has been quite bearish historically. The bearish tendency carries through over a significant period of time as well (10 weeks.) If the Nasdaq could begin to assert a leadership role, that could help the current rally attempt greatly. If not, bulls better hope it’s different this time.

Do Reliable Oscillations In The VIX Make VIX Options An Easy Profit Vehicle?

I’ve seen some articles in the press over the last few months suggesting that one way to profit in volatile markets is by trading VIX options. They typically make it sound easy. “You don’t even need to know the direction of the market. You just need to determine whether volatility is likely to rise or fall. If you think volatility is going higher, you can buy VIX call options. If you think its going lower you can buy VIX put options.” The problem with this logic is that VIX option prices do not follow the VIX index. They follow VIX futures prices. A couple of months ago I decided to quantify how much this really matters.

It is well known by traders that the VIX has a strong tendency to oscillate. Therefore, when people consider trading the VIX, they many times think mean-reverting strategies will work best. I took some simple mean-reverting strategies and applied them to the index to see what kind of returns I would get. Two examples were: 1) Short the VIX if it closes 15% or more above its 10-day moving average. Cover when it closes below its 10-day moving average. 2) Short the VIX if it closes at a 10-day high. Cover when it closes below its 10-day moving average. In both cases the opposite stretch would apply for purchases. Not surprisingly, they worked. What was intriguing was HOW WELL they worked. I then combined these strategies with a few others to create an indicator which would signal to me when the VIX was stretched and due for a reversal.

Assuming you treated the VIX as a security and allocated a certain dollar amount whenever you bought/shorted it, over the last 3 years my simple system would have returned about 170% per year based on raw returns (no commissions or slippage).

Now, to see the effect that trading futures would have on the system, I downloaded all the historical data from CBOE and ran the trades through using front month options. I performed rollovers those times when the future expired before the trade closed. Note that the entry and exit triggers were based on the action in the VIX – not in the futures. The purpose of the study was to see whether someone could trade futures/options based on the action in the VIX index. The results? Instead of returning 170%/yr over the last 3 years, the system now returned 5% total!! Factor in some commissions and slippage and my incredible system is now a money-loser.

Moral of the story: Be careful when trading VIX options / futures. Simple systems which look spectacular on the VIX cash index simply do not translate.

Below are some informative links which also discuss this issue.

http://vixandmore.blogspot.com/2007/05/vix-futures-one-picture-to-remember.html

http://mktbetadata.blogspot.com/2007/09/basis-risk-in-vix-futures-contracts-my.html

Surge Leads To Breakout – Is That Good?

More bailout talk today led to another surge of buying. The major averages closed strongly positive on good breadth and increased volume. Technically notable is the fact that the triangle pattern in the S&P was broken to the upside. An argument could be made that the triangle broke to the downside on Friday and that break quickly led to an upside reversal. Based on the definitions in the studies I laid out last week, there was no break on Friday. The first breakout came today. In this case I’ll stick with my definitions because those are the ones that were used to develop the statistics. The minimum target based on those studies’ triangle measurements would be 1446.57. Of note is that over 70% of these patterns have failed to reach their target before dropping below the lower triangle line. In this case a failure would mean a move below 1327.04. It appears looking for an entry to fade this breakout may provide the greatest edge.

The surge the last two days which broke this market out has certainly been impressive. I looked back to see how the market had reacted following similar boughts of strong buying. Below is a table displaying how the market has performed near-term following two strong days of buying during a long-term downtrend.


Historically, fading these surges has provided a decent edge. As can be seen in the picture above, not all breakouts are good news. Between the 2-day surge and the triangle breakout study it appears the edge over the next few days is to the downside.

Late Day Surge Doesn’t Help To Establish Direction

While the move down Friday morning may have violated trendlines some technicians drew on their charts, it did not signal a break for either of the triangle testing methods I laid out last week. For violations to be official I currently would need to see one of the following: 1316.75 broken on the downside for method #1, 1369.23 on the upside for method #1, or 1367.94 to the upside or 1327.04 to the downside for method #2. Therefore, as per the studies, we are still waiting for a break to look to fade. The studies on Thursday night suggested fading the breakout could be the highest-odds play.

While it failed to move the S&P 500 out of its range, the action Friday certainly wasn’t mundane. A late-day reversal led to a sizable upside surge – moving the indices from squarely negative to squarely positive. I decided to look and see whether past late-day surges had led to a directional edge over the days following. Looking back 30 years I was only able to find 22 other times where the S&P 500 gained over 1.5% in the last hour of trading. Results following those instances were mixed. Over the next one and two days the market closed higher 10 of 22 times. Over 3 and 5 day periods the market increased 14 times. Looking our further (10, 15, 20 days) results were close to a coin flip. The win/loss ratio in all these instances was close to 1 as well.

In other words – the late day surge on Friday seems to have no predictive value when looking out over the next few days. All it managed to do was put the market squarely back in the middle of its range. Traders with time-frames longer than intraday may want to continue to wait for a range resolution before getting aggressive.

Triangles

The formation that everyone seems to be focusing on at the moment is “triangles”. The major indices are all making them and the media and blogging community have taken notice. The standard line is that triangle formations show a contraction of volatility. A break out of the formation can lead to a sharp move in the direction of the breakout. So the big question being asked is “Which way is it going to break?” To me a better question seems to be “What is likely to happen after it breaks?”

The profit potential of a triangle breakout is normally determined by subtracting the low of the triangle from the high and adding that to the breakout point. Triangles are one of those formations that are easier to spot on a chart than they are to program, but I attempted it two different ways.

I first looked at formations where the most recent swing low was higher than the previous swing low and the most recent swing high was lower than the previous swing high. A breakout was defined as a move outside the nearest swing high or low. The profit target was defined as the distance from the entry point plus (or minus for shorts) the highest swing high minus the lowest swing low. A “failure” was defined as a reversal through the opposite swing point in the triangle.

The second way I defined a triangle was a bit simpler. I looked at weekly bars and defined any two consecutive “inside bars” as a triangle. Here again I set a profit target using the biggest bar and defined a stop point as a move through the opposite end of the most recent inside bar.

In both cases the success rates were highly disappointing. Looking at all S&P 100 stocks over the last 15 years, method 1 posted a success rate of about 38% and method 2 a success rate of 30%. The success rate in the S&P 500 Index over the last 30 years was 30% for method 1 and 27% for method 2.

Some traders may still be tempted to play the breakout because the potential reward is higher than the risk. Even so, method 1 was only slightly profitable as gains outsized losses by a mere 1.03 to 1 without factoring in commissions or slippage. Method 2 showed net losses.

It seems to me that the best way to trade these kind of triangle formations is not to play the breakout. Since about 2/3 of the breakouts I tested eventually failed, I’d rather wait for the breakout to occur and then evaluate possible reversal areas that could offer a more substantial edge.

Will The Reversal That Reversed The Reversal Reverse?

Tuesday night’s study suggested upside was likely over the next 1-5 days following Tuesday’s gap up and reverse lower. In my Subscriber Letter Tuesday night I suggested a gap down Wednesday morning to $134.50 or lower should offer compelling risk/reward for the long side. As luck would have it, the market actually gapped down and reversed up. I was glad to hear some traders were able to take advantage of this. So now the market has gapped and reversed two days in a row – leaving some participants scratching their heads and suggesting this market is acting crazy. In reality, it’s played out according to historical norms.

So is there any historical edge after the market gaps and reverses 2 days in a row as it now has? Assuming Day 1 is a gap up and reversal lower and Day 2 is a gap down that reverses higher I ran some tests. I tried running the tests with a number of different parameters, including adjusting the size of the gap and the size of the reversal. Generally this two-day pattern has led to short-term weakness – in effect reversing the reversal that reversed the original reversal. (Huh?)

As an example let’s look at the NDX. If you require a gap of at least 0.25% each day and a reversal of at least 1% from the opening price, the NDX has closed lower between 57.5% – 61% of the time over the next 1-3 days. Losses generally outsized gains as well. The pattern has occurred 41 times since 1986. The next day the market lost 0.8% on average. It lost 0.9% on average over the next 2 days.

The downside edge here isn’t huge but it appears overly optimistic to think today’s rally is going to send the market off to the races. In fact, the market seems more likely to lose a little over the next day or so and find itself stuck in the same range it has been.

An Ugly Gap Failure?

The market gapped up big today but couldn’t hold on to those gains as the S&P 500, Dow 30, and Nasdaq all finished in the red. Reading financial columns tonight you’ll be told that the inability of the market to hold on to its gains was a bad thing. The large black candlesticks are ugly. Market participants are selling into strength. All of which means there is likely more downside to come. But is any of it true?

I ran a study on the Nasdaq 100 tonight to find instances where the index gapped higher by 1% or more and then closed lower on the day. I wanted to see whether the negativity tended to carry through to the next day or next several days. Here’s what I found.

Going back to 1986, the NDX has had 52 occurrences where the market gapped up over 1% and then finished negative on the day. It closed higher the next day 54% of the time. The chance of the NDX being up on any day over the period was also 54%. Over the next 3 and 5 days the chances of the market being higher were 62% and 65% after a large failed gap up. The NDX has closed higher between 55.5% and 56.5% of the time over all 3 and 5 days periods since 1986. So looking out over three and five days the supposedly negative reversal actually seems to be a positive for the market.

Even more compelling is the average gains realized over the period. For the 1-day following the occurrence, the market gained on average 0.4%. An average day in the NDX since 1986 saw a gain of 0.06% – much lower. An average week for the NDX was about a 0.3% gain. The average week after the failed gap up? A 1.3% gain.

If you thought today looked bad and you were worried about the market going forward because of it – you shouldn’t be.

Quantifiable Edges Subscriber Letter

I’m pleased to announce the Quantifiable Edges Subscriber Letter is now available. Those who signed up to recieve the first week’s issues free of charge should have already have them in their mailbox. I decided to make the first issue available to anyone. Just click here. Trial subscribers will also be receiving a primer on “How To Get The Most Out Of The Quantifiable Edges Subscriber Letter”. Should you wish to receive the primer and the rest of this week’s issues for free, just drop an email to QuantEdges@HannaCapital.com with your name and email address. Any questions or comments about the Subscriber Letter may also be sent there.

Subscription information is available here.

I hope you all enjoy it.

Regards,
Rob

Follow Through Days – Better After Small Or Large Declines?

As someone pointed out in the comments section today, Investors Business Daily finally declared a Follow Through Day (FTD) on Wednesday. Therefore, I thought I should post the next study in my series on Follow Through Days. When we first started I had planned on this being Part 4, but the study has evolved as the market moved in interesting ways. For those who missed the first several parts of the series, you may click here for the full shebang. This will be the 8th post on the subject. When I am finished I hope to have the most complete and accurate information available anywhere on Follow Through Days.

Today I will try and assert whether Follow Through Days are more reliable after small or large declines. As you may recall, in the standard test I set up initially, I chose a decline of 8% to be required before a FTD would be looked for. To my knowledge, how deep or long a decline must be before someone can begin looking for a FTD has never clearly been defined. In September of 2005 IBD suggested that FTD’s can be useful even after pullbacks as small as 5%. I decided to look at how FTD’s performed after pullbacks of varying degrees of market declines. Below are the results from December of 1971 through today. Success parameters are laid out exactly as they were in Part 1.

After a decline of 5% or more – 115 FTD’s, 63.5% successful.
After a decline of 8% or more – 64 FTD’s, 54.7% successful.**
After a decline of 10% or more – 48 FTD’s, 48% successful.
After a decline of 12% or more – 36 FTD’s, 44.4% successful.

Generally, the deeper the decline, the less likely it is that a FTD is going to be successful. It is reasonable that more serious selloffs have more difficulty reversing. It is a bit disappointing though that a tool which is billed to signal the end of a market decline seems to fair worse when it’s needed most.

** This was the base test looked at previously.

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Count To Three


In Larry Connors’ book “How Markets Really Work” he devotes a chapter to “Up Days In A Row vs. Down Days In A Row”. He looks at how the market has performed after it has moved in one direction for 1, 2, or 3 days in a row. Because of the long-term upward drift of the stock market, very few of the studies published in the book show much of a negative tendency. One situation that showed a negative tendency over the following 1, 2, and 5 day periods was when the market was trading below its 200-day moving average and had posted three higher closes. (This happened today.)

The book looked at data from 1989-2003. Over that period the following results were shown:


Since the end of 2003 it has only happened 4 times until today. Those dates were 7/29/04, 8/17/04, 8/26/04, and 11/29/07. So Larry’s data for this study remains pretty current.

I tested back 35 years and found the results to be similar. About a coin flip on direction, but downside risks were higher than upside rewards giving the next 1-5 days a negative expectancy.


This study on its own is not a reason to sell short. It should serve as a caution though for those holding long positions. Rallies during longer-term downtrends are not normally very persistent. Long-side traders will many times shorten their time frames while short-sellers use the bounces as an opportunity to add more short exposure – all causing a lot of backing and filling. Also note that two of the highest volume days of the last two and a half weeks were on January 31st and February 1st. A lot of people bought a lot of stock on those two days. They’ve been underwater ever since. After three up days in a row, the market has moved back into the middle of the range of those two days. We may see a lot of folks here that are relieved to be able to get out near breakeven on their purchases. This should create some additional selling pressure.

Seems to me like a good time to tighten things up on the long side. Aggressive traders could consider taking a shot short here soon if they’re able to find a favorable entrypoint.

Rob Hanna

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Would you like detailed market analysis, CBI sector coverage and quantified actionable trade ideas from me several times per week? The Quantifiable Edges Subscriber Letter is coming soon! Just send your name and email address to QuantEdges@HannaCapital.com to receive the first week’s issues free of charge. More details should be available this weekend and the first issue will likely go out some time next week.

The Double Support Trailing Stop

Today saw some big swings but did little to change my moderately bullish bias. Rather than post a study tonight, I thought I’d change things up a bit.

In some comments on January 23rd, “Tim” mentioned he remembered an article I’d written a long time ago in which I discussed “double support stops”. (It was actually the first column I ever published). Since then I’ve seen a large number of readers have done searches on “Double Support Stop Rob Hanna” or something along those lines. Anyway, the column can’t be found anywhere anymore. But you want it – you got it. From way back in 2002 (along with a 2002 chart and ticker symbol – the ticker has since changed to HW if you want to pull it on your own software), I give you “The Double Support Trailing Stop”.

The Double Support Trailing Stop

The Concept
Like most traders, I have a whole checklist of criteria that must be met before I will consider purchasing a stock. I spend a substantial amount of time researching potential candidates so that I may find a few stocks that meet my criteria. One of the most frustrating and difficult things for me is finding a great stock, buying it at the right time, and then being stopped out of it just before it reverses and goes on to huge gains. Having traded in multiple time frames over the years I have experienced this frustration with day, swing, and intermediate term trades. To keep myself in winning trades longer and avoid being shaken out early, I developed my “Double Support Trailing Stop Technique”. I will show an example of this technique on an intermediate term trade, but have successfully employed it in many different time frames, and originally created it for my day trades.

The idea is simple. If I require a large numbers of reasons to enter a trade, I should require more than just one reason to exit it if I want to catch as much of the move as possible. I will therefore require two levels of support to be broken before I will PERMANENTLY & COMPLETELY exit a trade. How you define support does not really matter. You can use pullbacks, consolidation lows (or highs), fibonacci’s, moving averages, trend lines, or whatever fits your trading style.

An Example
Being that the below example is an intermediate term trade, I simply used consolidations & pullbacks, along with the 50 day moving average (shown as the rising blue line) for my support levels. I define a pullback to be any bar (or series of bars) with a lower low AND lower high after a stock has made new highs. The stock shown is Headwaters Inc (ticker: HDWR). I purchased this stock as it burst out of a flat base in the middle of March. My initial stop on the breakout would have been 8% from my purchase price, or the low of the base. After breaking out, it moved up sharply for 5 days before starting to pull back. It pulled back for seven days before reversing and moving higher. The low of this pullback is near the 1st green arrow labeled “Support”. It became support in my eyes after the stock move higher from there by making a higher high and higher low on the next bar. When that happened I was able to move my initial stop up to the breakout point. (I consider the high of a flat base or high tight flag to be a level of support also.)

Next, the stock moved up again for several days before making a second pullback down to the green arrow labeled “Broken Support”. The “Broken Support” bar was initially just the next area of support after the stock had pulled back and moved higher. When that happened, I was able to move my stop up under the 1st green support arrow. It became “broken” 5 days later when the next bar labeled “Support” moved below the low of “Broken Support”. If I had exited at the “broken support” level here, I would have been shaken out of the stock and missed the rest of the move. Instead, the stock continued to move up and create higher and higher support levels.

The time came for me to sell this stock at the area marked “Double Support (Sold When Broken)”. It was at this time that the stock moved below two levels of support. The first was the 50 Day Moving Average, and the second was the pullback low just above the “Double Support” green arrow. As you can see, this turned out to be a good time to take profits and exit this trade. Three days later it was trading nearly 30% lower.

Additional Considerations
Earlier I used the term “permanently & completely exit”. Due to the fact that the 1st and 2nd levels of support may be very far away from each other in some instances, I may consider exiting the position partially, or exiting and then looking for an opportunity to re-enter the position, when it breaks the 1st level of support. The main reason I would do this is not to give back too much of my profits. Once two levels of support are broken, I want to be completely out of the position and will not consider re-entering without a whole new base setting up.

Since the “Double Support Trailing Stop” will keep you in positions longer, it is most effective when you are trading with the overall trend of the market. In other words, long positions in an uptrending market, and short positions in a downtrending market.

Can Contracting Range Hint At Direction?

After the negative inside day on Friday, the S&P refused to sell off hard and even posted a decent gain today – breaking its recent streak. Perhaps this may signal a change in character from the downtrend since the October highs. Traders may not be looking to leave the party every time there’s a pause in the conversation.

Speaking of pauses, have you noticed how the price range has been tightening? The range over the last 3 days has been the tightest of any three days since December. Even more interesting to me is that over the last 13 days, the high-low range the S&P 500 has traveled has barely exceeded the range it traveled in the one day prior to that. The SPY on January 23rd had a range of $7.35. Since then the total range has been $7.88.

Looking at the S&P 500 cash index I went back to see other times the market traded in a range nearly as tight relative to one bar over a 13-day span. The parameter I used was that the range of the last 13 days had to be within 115% of the range of the 14th day back. I found 31 other occurrences going back 30 years. Twenty-five of those occurrences saw the market higher a month later. Only three times that I found was the range contraction followed by a break to the downside which led to significantly more selling. Those occurrences were August 1985, September 1990 and August 1998.

This study seems to be another example of what I’ve been seeing lately. Over the next several weeks risk/reward appears to favor the upside. Even this contracted range has some serious volatility, though, so risk should not be underestimated. Good timing and proper (reduced) position sizing appear key.

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On another note, I was pleased to have my recent post on leadership breadth appear in this week’s Festival of Stocks along with many interesting columns from other bloggers.

Why Inside Days Get Me Down

Friday was an inside day. For me that meant laying in bed most of the day trying not to vomit. For the market that meant a lower high and a higher low than Thursday causing Friday’s range to be completely “inside” Thursday’s range. The indices also closed lower on the day. Below is a chart of the SPY going back to October 8th, which was the day it closed at its highest level. Every inside day with a down close is marked with a blue dot.

The return following each of the inside days with a down close is as follows: -0.48%, -2.62%, -1.27%, -2.45%, -2.64%. That is an average loss of 1.9% the following day. Five for five losers. The pattern isn’t pretty.

Even before the recent market top, this pattern has had bearish tendencies. Looking back to the beginning of 2004, there have been 53 inside days with down closes for the SPY. Sixty-four percent of them were followed by a selloff the following day. The average loss was about 0.7% and the average gain 0.5%. Total losses outsized total gains by 2.3 to 1.

Looking back even further, since the 2000 market top, the SPY has closed down 58% of the time following an inside day with a down close. There were 104 occurrences. The average loss the next day was 0.9% while the average gain was 0.6%. In all total losses outsized total gains by about 2.1 to 1.

Friday’s pattern may have been an ideal one for me while trying to deal with the flu. For the market, the pattern has historically signaled short-term trouble.

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Two other quick notes:

After conducting the study I did a search on “stock market inside day”. Dr. Steenbarger had an interesting study regarding them a couple of years ago.

In the comments section after my study of leadership breadth at market bottoms on Thursday night there was some discussion of the importance of looking at new low figures near market bottoms. Dr. Steenbarger also saved me some time this weekend and wrote a nice post on new lows near market bottoms. Thank you Dr.! (Now how about a little something for the nausea?)