Monday, September 07, 2009

A Beginning Look at Stock Market Momentum

Are markets that are strong in the most recent time period more likely to trade above the highs for that period in the next period?

Are markets that are weak in the most recent time period more likely to trade below the lows for that period during the next period?

I went back to mid-2006 and examined whether the S&P 500 Index (SPY) closed above or below its weekly pivot price (an estimate of average trading price; see here) to see if the close affected the likelihood of hitting key price points during the next week.

What I found was:

* If SPY closed above its weekly pivot, the next week traded above the prior week's high price 175 times and failed to touch the high price 56 times.

* If SPY closed above its weekly pivot, the next week traded below the prior week's low price 65 times and failed to touch the low price 112 times.

* If SPY closed below its weekly pivot, the next week traded above the prior week's high price 60 times and failed to touch the high price 171 times.

* If SPY closed below its weekly pivot, the next week traded below the prior week's low price 147 times and failed to touch the low price 53 times.

What that suggests is that markets that close strong (weak) on the week tend to make new highs (lows) the following week.

I then looked at weekly advancing and declining issues for the NYSE. I wanted to see if strong (weak) markets in the prior week carried over their strength/weakness to the following week. What I found was:

* If the weekly A/D ratio was positive in the most recent week, SPY traded the next week above the prior week's high 176 times and failed to touch the high price 76 times.

* If the weekly A/D ratio was positive in the most recent week, SPY traded the next week below the prior week's low 65 times and failed to touch the low price 112 times.

* If the weekly A/D ratio was negative in the most recent week, SPY traded the next week above the prior week's high 88 times and failed to touch the high price 164 times.

* If the weekly A/D ratio was negative in the most recent week, SPY traded the next week below the prior week's low 117 times and failed to touch the low price 60 times.

Once again, we see that strong markets tend to take out the high prices during the following week; weak markets tend to take out the low prices during the following week.

This suggests that buying (selling) pullbacks (bounces) late in a strong (weak) market weak and holding over the weekend for a test of the prior week's highs (lows) could be a promising strategy. More on the basics of a Momentum swing trading system to come.
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2 comments:

Dan Padavona, CortlandFootball.com said...

Great research as always. My concern looking at the initial results is whether the "momentum continuations" were the result of trade-able moves, or occurred because the week 1 Close was within a few points of the High and was "easy" to overcome.

Looking forward to more research. It appears you are off to a great start!

Jay said...

I wonder how much of that follow thru was in or outside of NY/Chi market hours. If much of it was outside then swing was needed for those gains rather than pure day trading, thus requiring overnight margin amounts, a little more expensive than the 25 percent of initial required for day trading.