Tuesday, June 16, 2009

From A High to a Low in 1 Day

I noted in a tweet last night that big moves down are more short-term bullish when they aren’t occurring from a high. This was a bit of an understatement. They’re often short-term bearish. Yesterday’s drop moved the S&P 500 from a 10-day closing high to a 10-day closing low. Since 1960 there have been only 10 other times this has happened. In last night’s Subscriber Letter I show the results of those 10 instances.

To get a larger sample size I also reduced the requirements from a 10-day high and low to a 7-day high and low. Those results are below. (Click table to enlarge.)



These results suggest more downside, especially over the next 2-4 days.

For more discussion on big drops from highs you may want to review this former study.

P.S. I just noticed that Dr. Brett also looked at the 10-day high to 10-day low move this morning. See what he has to say here.

5 comments:

Andras said...

If you add the preceding long buying stampede to the conditions (ex: rsi(3) > 20 for 5-7 weeks), it will paints an another picture. Not bearish at all, but it is worth to mention, that running on the DOW it will mark exactly the top in 1930, just before -90% slide.

Steveo said...

Awesome work as always.

I keep thinking though...everyone is so excited by a drop I don't see much commment that this is Expiry week (and a 3X or 4X witch?). I wonder how that intertwines with the current drop?

Eric said...

Rob, the problem with that metric is that the 7 or 10 day high... is maybe a 3% or 5% move....

then the downside sounds like a big move when honestly it's like a 3SD move.

One side of the measure is TOO Small.

I wonder if there is a "Market in 10 days shows a contraction in Average True range" then the result of say a 30 day cycle...

Some people are on the slope of hope on this.

Anonymous said...

Tom Demark has an indicator based on this concept. Its called a 7-11 or LV. It involves a series of price comparisons generally associated with an impending price breakout. The key comparisons relate to the current trading day's closing price versus the series of 7 previous consecutive trading days' highs or lows. The study consists of one firm criteria and 4 conditions that should be examined:
For a potential upside breakout, the previous day's closing price must be less than the closing price five trading days ago. Conversely, for a downside breakout, the previous trading day's closing price must be greater than the close five trading days ago. In other words, the price comparison between the previous trading day's close and the closing price four trading day's prior to that day's closing price dictates whether users should look for a possible upside or downside breakout.

He also suggests that the current day's closing price be examined versus the series of seven previous trading days' highs for a potential upside breakout and the seven previous days' trading lows for a potential downside breakout. Upside breakouts are indicated, on a preliminary basis, if the close one trading day ago is less than the close four trading days earlier.
Another crucial comparison is the current day's closing price versus the series of 11 previous trading days' highs for a potential upside breakout and versus the series of 11 previous trading days' lows for a potential downside breakout.

-If the current day's close is greater than all the previous seven trading days' highs and, at the same time, not greater than all the highs of trading days 8 through 11 (inclusive), the advance should fail. However, if the close of the current trading day is greater than all the previous 11 day's highs, the advance should continue.
-If the close of the current day's trading is less than all the previous seven trading days' highs and, at the same time, not less than all the highs of trading days 8 through 11 (inclusive), the advance should fail. However, if the close of the current trading day is greater than all the previous 11 day's highs, the decline should continue.

The fourth condition that should be examined is the previous day's closing price relative to the close one trading day earlier.

The last conditions relates to the market's potential to follow through on succeeding day(s) after breakout indications.

Tamás said...

Andras please drop me an email to ewebertamas@gmail.com. I would be curious about your bactesting experience and methodologies. Kösz.