Thursday, December 22, 2005

What Happens After a Strong Inside Day?

What I like to do with modeling is look for what is distinctive or unusual about the day's trading and then see what tends to happen subsequently. On Thursday we traded higher, following the pattern noted on Wednesday. Even though SPY was up over half a percent, however, it was still an inside day. That led me to wonder what happens after inside days and especially after strong ones.

Since January, 2003 (N = 748), we've had 99 inside days in SPY. The average three-day change in SPY for the sample overall is .14% (436 up, 312 down). After an inside day, the average three-day gain is only .02% (53 up, 46 down).

When the inside day is up by half a percent or more, however (N = 21), the average three-day change is .32% (13 up, 8 down). The remaining inside days average a three-day loss of -.06% (40 up, 38 down).

I sliced and diced the data other ways, but the modest conclusion is that outcomes are more bullish following strong inside days than weak ones. There is certainly nothing in the data to support fading a strong inside day.