It's been a while since my last post, I have taken time off blogging to work on compiling historical data and better ways to look for the edge.
Last Friday (1/22/2009) marked the third consecutive days SPY closed lower. Before today's opening, I did a quick check on the historical tendency on the day after three consecutive close. Without any filter, there are 108 instances since 2002 where SPY closed lower three consecutive days. Out 0f 108 instances, 60% of the following day closed higher, but three days out SPY has negative expectancy if going long. My interpretation is that market has high tendency to retrace after three consecutive lower closes, but the bounce is USUALLY not a big rally and market tends to chops and consolidate immediately after three days of consecutive lower close. After 10 days, market tends to retrace all the drops caused by the three days. However, when things goes wrong the floor just drops off. The most recent incidents are 12/19/2008 and 2/2/2009. SPY moved around -9% and -15% respectively 20 days out.
Adding a filter of the last drop being more severe than -1.5%, the picture changes completely. The next day closed lower 56% of the instances with average of -0.36%. The historically edge lies with the short side producing an average of -0.36% and -0.19% for longs. Market also tends to bounce back very strong after such severe drop 5 days out with peak of 2.93% 19 days out.
