Friday, October 26, 2007

Intraday Movement in the S&P 500 Index

This will kick off a series of posts regarding the intraday movement in the S&P 500 Index and factors associated with patterns that may hold a trading edge. We'll start with very simple observations and then add variables as the posts progress.

Going back to 2004 in the S&P 500 Index (SPY), we have 961 trading days. Of these 961 days, 528 closed higher than the day previous, and 427 closed lower.

Of the 961 trading days since 2004, 516 traded above the previous day's high price and 433 traded below the prior day's low. Interestingly, however, only 274 of the 516 occasions actually closed above the prior days high and only 211 of the 433 occasions closed below the prior day's low.

What that illustrates is that, if we consider the previous day's trade to represent a trading range, the next trading day often trades outside the range but ultimately falls back into that range.

Along that line, only 129 out of the 961 days--less than 15%--are inside days (i.e., trade with both a lower high and a higher low than the prior day). Thus, 832 out of the 961 days break out of the prior day's range at some point during the day, but only 485 of those occasions (about 60%) actually close outside the previous day's range.

Out of the 961 trading days, 117 (or about 12%) were outside days (i.e., trade with both a higher high and a lower low relative to the prior day). Of these outside days, only 24 closed higher than the prior day's high and 40 closed lower than the previous day's low. This means that, once again, about 40% of all moves outside the prior day's range returned back to that range.

As we look at variables beyond current and recent price, we will want to identify those that help us determine which days will sustain their moves outside the prior day's range and which will revert to that range.

Now for just one added variable:

When the current market closes in the top half of its daily trading range, the next day takes out the previous high price 378 out of 554 times, or about 2/3 of the time. When the current market closes in the top half of its daily trading range, the next day takes out the previous low price on 189 occasions--about 1/3 of the time.

When the current market closes in the bottom half of its daily trading range, the next day takes out the prior low price 244 out of 407 occasions, or about 60% of the time. When the current market closes in the bottom half of its daily trading range, the next day takes out the prior high price 138 times--about 35% of the time.

As we might expect, then, strong closes (those that finish in the top half of their trading range) are more likely to be associated with days in which we trade above the prior day's high; weak closes are more likely to be associated with days in which we trade below the prior day's low. Only about 1/3 of the time will a strong (weak) close be followed by a break of the prior day's low (high).

When we close strong, the next day closes above the prior day's high 210 out of the 378 occasions in which it trades above that high. When we close strong, the next day closes below the prior day's low only 91 of the 189 occasions in which it trades below that low. Once again, we see that many days that trade outside the prior day's range fall back into that range.

Similarly, when we close weak, the next day closes above the prior day's high 64 of the 138 occasions in which it trades above that high. When we close weak, the next day closes below the prior day's low 120 of the 244 occasions in which we trade below that low. In other words, half of all occasions in which we trade below the prior day's low don't ultimately close below that low.

These are basic observations; nothing in them by themselves is a trading pattern. But there are some interesting findings. 85% of all days will trade outside the prior day's range. Only 50-60% of all trading days, however, will close outside that range. About 2/3 of strong days will be followed by days that trade above the prior day's high; 2/3 will stay above the previous day's low. Similarly, about 60% of weak days will be followed by days that trade below the previous day's low; about 2/3 will stay below the prior day's high.

Let's see in upcoming posts if any indicators help us shift those odds further.

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7 comments:

Anatrader said...

Brett

I cannot help but to comment having been mentored on the Market Profile.

The key is to observe where the market opens relative to the previous day's Value Area. If the market opens above the VA and then proceeds to breach the previous day's high, then the market is unlikely to return to the previous day's VA.

If the market opens above the previous day's VA, and enters the VA, then we can expect the market to return to the previous day's range, after the market breaches the previous day's high.

If the market opens within the previous day's VA, then any breach of the previous day's high will be accompanied by a return to the previous day's range.

In Market Profile terms, an opening above the previous day's VA that is followed by a breach of the previous day's high is likely to result in a one-time frame market up day.

For the other two scenarios, the market is likely to form a rotational day.

Martin Aston said...

Hi Brett,
I am a european timezone trade. When compiling your stats on , say, the s & p , do you include the overnight session , or just the day session ?
Also what effect do you think the overnight sessions have on ORB plays. Do they make them less viable?

robin said...

Thanks Brett for all the time and work to deliver your research to us. I have never recieved as much help from as you have given to us traders. Have you ever compiled studies towards the 30 year bond futures? thanks for everything!

Brett Steenbarger, Ph.D. said...

Hi AnaTrader,

Yes, the placement of the prior day's value area (and value on a longer term basis) is an important contextual factor to consider in gauging breakout attempts. Thanks!

Brett

Brett Steenbarger, Ph.D. said...

Hi Martin,

I'm looking at SPY in these posts, so it's day session data only. I have looked at ORB patterns and odds of breakout, but never as a function of overnight action.

Brett

Brett Steenbarger, Ph.D. said...

Hi Robin,

Thanks for the comment! I'm afraid I'm a dyed-in-the-wool equity trader; I haven't studied fixed income. But it seems to me that the same framework for gauging likelihood of moves could apply to bond futures--or any trading instrument with daily OHLC data.

Brett

janakiram said...

I am amazed at your insight into the historical data on the S&P 500 index. I am interested if you can enlight me on the trend reversals which takes place within a day's trading in the S&P 500 index.What I mean is if the S&P500 opens higher and trader higher for most of the session is it likely close higher at the end of the day as compared to the start of the day. Thanks for your attention.
Raj, Vancouver,Canada