Wednesday, October 21, 2009

The Last 4 Days Price/Volume Pattern

Price/volume the last 4 days has done the following. Thursday the SPX closed at a 50-day high on lower NYSE volume. Friday SPX closed lower and NYSE volume rose. Monday we got another 50-day closing high on lower NYSE volume. Tuesday another market drop with rising volume. That certainly sounds like a bearish price/volume pattern. I took a look.

Going back to 1970 I was only able to find two other instances with the same 4 day pattern where 50-day highs were being made. The 1st was 3/26/81 and it was followed by a decline of nearly a year and a half. The 2nd instance was 6/6/95 and that was followed by a 3-day consolidation and then a continuation of a massive bull market. Nothing to learn there.

But what if we look at the 4-day price/volume pattern on its own and not require new highs be made? Based on common knowledge it would still seem to be bearish. Below are stats going back to 1970:

It could be argued that the above results suggest bullish tendencies, especially over the 4-7 day period. I don’t see any evidence that suggests the current 4-day price/volume pattern is bearish.


SJG said...

Try going back to 1970 and asking what happens if you buy on any random day and sell x days later. I bet that you would have a slight positive outcome because the market spends most days moving up. If that result is 'baseline' or 'noise' wouldn't results from your test have to be better than that (or much worse) to indicate a statistically meaningful result?


Rob Hanna said...

Results would have to significantly better than long-term market drift if the results were to be interpreted as bullish. They are better, but the significance is borderline. That's why I said "It could be argued that the above results suggest bullish tendencies...". In my eyes, it's borderline.

I don't see how anyone could argue these results are bearish, and that was more the point.

High volume drops are often incorrectly interpreted as bearish. Today's test is consistent with others I've run. Here are two more that come to mind: