Monday, June 4, 2012

A New Look At 3 Down Days After An FTD

Last June I showed a study that looked at times the SPX pulled back 3 consecutive days after a Follow Through Day (FTD).  Johan pointed it out in the comments so I thought I should take a fresh look.  I made an adjustment an re-ran the results.  The adjustment was that the study last June was conducted using the list of FTDs from the original Follow Through Day study.  Since then, all of the FTD studies I have conducted have used a more complete list.  The difference is that the original list was as generous as possible in determining a failure.  It required the market to close below its intraday correction low before being deemed a fail.  The more complete list simply requires an intraday probe to a new low, and it doesn’t look at the close.  If I use the newer list, rather than the original, then results would look like this:

Results still appear bullish, but the 2 additional trades are both losers (over the 3-day period).  They occurred on 8/2/82 and 10/13/98. There is also 1 important factor to consider about Tuesday’s FTD.  It has already failed.  The market hit new lows on Friday.  There have only been 3 other instances of FTDs that have failed so quickly.  One was the 8/2/82 that was just added to the study.  The others were 3/8/01 and 9/25/08 (neither of which were followed by 3 down days in a row and are not included in this study).  I'm not sure that the fact that the rally has already failed will matter, but it does mean the market is in a different state. It is undergoing a selloff and no longer involved in a rally attempt. And just the fact that we are in a different state makes me cautious about this study.

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