Monday, March 06, 2006

Big Down Day: What Happens at the Open?

Quick note before Tuesday's open. A reader asked me what happens at the open after the market has moved down sharply. I looked at SPY from March, 2003 to the present (N = 758) and found 106 instances in which the market was down .75% or more from open to close. The next day's open averaged a gain of .09% (72 up, 34 down)--considerably stronger than the average overnight move of .04% (415 up, 343 down). There is thus no evidence that weak markets during the day session spill over to the overnight and, in fact, we see a modest bounce more often than not in the overnight. Given the tendency of strong downside momentum markets to continue weakness in the short run, this may set up a trade of selling strength early the next day.

Thanks, BTW, for the kind comments sent to me re: the recent Trading Markets article.

4 comments:

John Wheatcroft said...

Good stuff - I too have been doing some study on these phenomena. I have made some nice profits buying at the end of down days and selling at the open the next day.

But I am working on a refinement to this based on European action overnight (actually our early morning). Although the FTSI follows the US lead sometimes it does not. This generally acts as a bellweather to market activity the next day in the US. Have you tracked any of that?

Brett Steenbarger, Ph.D. said...

Hi John,

Thanks for the great observation. I have looked at the DAX in that vein but not the FTSE. I will definitely put that on the to-do list of analyses. Overall, early strength/weakness in the DAX has led the S&P.

Brett

Bob Rogers said...

Brett,

I've seen comments from other traders that say there is a statistical edge for buying the sp on the close when the closing trin is >= 2.00

Is there a greater edge of the S&P opening higher when it closes -.75 with a trin >=2.00?

Brett Steenbarger, Ph.D. said...

Hi Bob,

Thanks; I'll post TRIN findings shortly.

Brett