Monday, May 20, 2013

This 3-Day Pattern Is Suggesting Caution For Today

After Wednesday’s move to a new high, Thursday put in an inside day.  With Friday closing at another new high the study below triggered, which I have only previously shared in the Subscriber Letter.  It showed that SPY closed down the next day 13 of that last 15 times following a 50-day high, then an inside day, and then another 50-day high.  Below I have listed all 15 instances.

Risk/reward here heavily favors the short side. The average drawdown is slightly over 4 times the size the average run-up. Also notable is that every instance saw drawdown of at least 0.35% the next day, but only 1 of the 15 instances saw run-up of at least 0.35%. Traders may want to take this into consideration for the upcoming day.

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