Deceleration of Decline Suggests Bounce

When there is a rapid deceleration in what was once a sharp selloff that often indicates a bounce is near. I’ve shown some examples of this concept over time. One way to look at deceleration would be by looking the size of the bars. Friday’s Quantifinder found the following study from the 6/24/08 blog. This study uses WR7 and NR7 days. A WR7 is a day whose range is the widest in the last 7 days. An NR7 is a day whose range is the narrowest in the last 7 days. All stats are updated.

This study suggests a decent upside edge over the next week-plus. One aspect of this study that I find particular appealing is that it has been consistent over time. Below is a profit curve using a 5-day exit strategy.

The consistent upward slope shown here is preferable to a jagged equity curve or one where most of the profits were made in a small number of trades.