Here we see the sharp 1-day selloff has typically led to a muted bounce that then rolls over to make new lows. Instances are a little low. When I loosened them to a 2% drop I saw the same pattern.
But what if the market was at a 5-day low instead of a 5-day high? Results in that case would be much different:
But what if the market was at a 5-day low instead of a 5-day high? Results in that case would be much different:
Here we see a sharp initial bounce that is followed by more upside. In this case the sharp selloff is possibly exhaustive. That's not the case when coming off a top. The expectation turns from negative to positive based on where the sharp selloff is occurring. So remember, when considering the meaning of a bar or pattern or of bars it is also important to consider the positioning.
4 comments:
Thanks, Rob. This kind of analysis and deeper-level thinking are why I subscribe to the Quantifiable Edges RSS feed.
Your analysis supports the case for mean reversion.
Why does the # of trades change?
Technically we just had a >2.5% down on Feb 17 from a 5 day low. What does your analysis say about the odds for this case when immediately following a >2.5% down from 5 day high?
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