Sunday, December 18, 2005

Neutral Trading Weeks

This past week, the S&P 500 barely budged. I went back to January, 1996 (N = 516 trading weeks) and examined what happens after SPY is neither up nor down more than .20% during the week (N = 34 occasions). The following week, SPY was up by an average of .03% (15 up, 19 down), certainly no bullish edge relative to the sample overall (.17%; 280 up, 236 down). Three weeks out, however, was more positive. After a neutral week, SPY averaged a three-week price change of .89% (22 up, 12 down), compared with .51% (287 up, 229 down) for the sample.

As we saw in yesterday's posting, how the market traded during the period of analysis made a difference. When the neutral SPY week closed nearer its week's lows (N = 17), its next week's change averaged -.38% (5 up, 12 down) but three weeks out it averaged 1.18% (12 up, 5 down). When the neutral SPY week closed nearer its week's highs (N = 17), its next week's change averaged .43% (10 up, 7 down) and three weeks out it averaged .59% (10 up, 7 down).

Overall, after a neutral week in SPY, there is no directional edge going forward the next week, but some indication of strength three weeks out. This is especially true for neutral markets that close weak (such as this past one). They tend to see weakness spill over into the following week before reversing and closing stronger three weeks out.

I will be exploring more intraday and intraweek patterns relative to how we open and close. The above finding is interesting, but clearly not based on a huge sample. And, of course, it will be interesting to see how markets other than the S&P test out.

2 comments:

BDG123 said...

Brett,

Have you ever thought of increasing the granularity of your probability analysis? ie, We all know market action is significantly different when something as simple as daily or weekly stochastics are rising or are overbought than if they are falling or oversold. Or, if the 10dma is rising or falling. Or, if certain sentiment condition are in place. etc, etc, etc. You'd be my hero. :)

I use intraday extremes of TRIN, TICK and AD Oscillators along with some daily sentiment to gauge the same end results....I've found sometimes worthwhile but only in relatively small, high probability situations.

Just curious.

Brett Steenbarger, Ph.D. said...

Hi,

Thanks for the question. My intraday probability work takes a different form from what I'm posting on this site. Most of it calculates the probability of price hitting a particular level, such as the previous day's high or low, the previous day's average price, or the current day's average price. For example, given that X and Y occur in the morning, I calculate the odds of the afternoon price reaching a new high or low for the day. This then becomes a potential trade idea. At some point I might post those kinds of analyses online, but so far I use them only for my own trading and to occasionally assist interested traders at my firm. Where the analyses would be most helpful would be in a Hotcomm-style room that monitors the market in real time (and thus can conduct the analyses on the fly).