Where the market closes within its daily range can be an indicator of sentiment. Over the years I have shown studies indicating persistent closes in one direction often lead to a reversion. An example of overly-optimistic closes was shown in the July 5, 2012 blog post. We are now seeing a setup suggesting excessive pessimism. Tuesday was the fifth day in a row that SPY closed in the lower half of its daily range. The study below was shown in the 12/20/11 subscriber letter (and again last night). It examines 1-day returns following similar strings of poor closes.
The numbers here appear to be strongly compelling and indicate a possible upside edge for Wednesday.
Also, a reminder to readers that I will be speaking at the Las Vegas Traders Expo on Saturday. In my talk I will be sharing a lot of my favorite overnight research. I look forward to meeting several of you!