20 Day Low vs. Close Higher/Lower for the Day

When I first started learning swing trading, one of the fist thing learned is to trade breakout and follow the trend. I learned specifically to short SPY when it makes 20-day low and go long when it makes 20-day high As anyone who has done any trading, nothing was this easy. The market does produce big moves more often than normal distribution, but the likelihood of reversion is also higher than normal distribution.

I next ventured into the world of technical analysis, and learned that I should not be following trend. I should fade trends most of the time. Instead of selling 20-day low and buying 20-day high, I should buy when the market makes 20-day low with reversal bar.

In this post I compared the average of 1, 3, 5, 10, and 20 day out after SPY made 20-day low and breaking the group into days that closed higher and days that closed lower. Since 2002, there are 18 instances that SPY closed higher for the day when it makes 20-day low and 178 instances that SPY closed lower for the day on the day of 20-day low.

The chart shows two important points:

1. In average, SPY performs better when it closed higher for the day when making 20-day low.
2. Regardless how the day closes, SPY has positive expectancy.

However, hiding behind the positive expectancy is that when SPY close higher on the day of 20-day low, 5 and 10 days out about 60% of time SPY actually drops below the low.