Tuesday, December 8, 2009

Does An Inside Day After An Outside Day Provide a Directional Edge?

After posting an outside day on Friday, the SPY followed up with an inside day on Monday. This was also noted by Scott Andrews of Masterthegap.com last night. I’ve recently become acquainted with Scott’s work and find his application of statistical analysis to trade gap fills very interesting. I ran some tests to see if the outside day / inside day combination provided any edge over the next few days.

The initial results looked like there was a possibility of a mild upside edge. Further investigation suggested the edge more likely is non-existent. Below is a profit curve that shows a 4-day exit strategy which should explain why I say this.

From this chart is appears that an edge MAY have been in place during the raging bull of the 1990’s. At that time just about any consolidation was followed by a strong move up. Since the end of 1999, though, the profit curve is a complete flatline. It appears that whatever edge there may have been back then is no longer in effect.

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