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Wednesday was a big day for the Dow Jones Industrial Average; seventh best to be exact. But this does not necessarily mean that the index is poised to continue higher over the next year.

When looked at on a percentage basis, Wednesday’s 490.05 point move does not even crack the top twenty. This should not be surprising as the Dow first topped 10,000 in 1999. With this larger base, large point moves are more likely because, by their nature, they are smaller percent moves.

In fact, the top twenty daily gains in the Dow have all happened after the year 2000, three of them this year alone.

The top twenty daily moves are:

Rank

Date

Close

% Change

Rank

Date

Close

% Change

1

2008-10-13

9,387.61

+11.08

11

2011-08-09

11,239.77

+3.98

2

2008-10-28

9,065.12

+10.88

12

2011-08-11

11,143.31

+3.95

3

2008-11-13

8,835.25

+6.67

13

2008-03-18

12,392.66

+3.51

4

2000-03-16

10,630.60

+4.93

14

2008-03-11

12,156.81

+3.55

5

2009-03-23

7,775.86

+6.84

15

2008-10-20

9,265.43

+4.67

6

2008-11-21

8,046.42

+6.54

16

2008-09-18

11,019.69

+3.86

7

2011-11-30

12,045.68

+4.24

17

2010-05-10

10,785.14

+3.90

8

2002-07-24

8,191.29

+6.35

18

2001-04-05

9,918.05

+4.23

9

2008-09-30

10,850.66

+4.68

19

2008-10-16

8,979.26

+4.68

10

2002-07-29

8,711.88

+5.41

20

2001-04-18

10,615.83

+3.91

All of this moves are significant, however, as the chart below shows, they do not necessarily lead to continued gains.

DJIA 2000-2011 showing extreme positive moves

The chart seems to indicate (i) that extreme positive days often, especially in 2008 and 2009, happen in down markets and (ii) extreme positive days often follow each other.

Of the top nineteen (to exclude Wednesday) extreme positive days, another top twenty day followed within seven trading session on seven occasions or 37% of the time. Expanding this slightly, within twenty sessions another big upwards move occurred a total of 11 times or 58% of the time.

Notwithstanding the above relation, as the chart below shows, on average the Dow is down nearly 10% 100 trading sessions after a big upward move and takes nearly 200 sessions for it to return to where is was just after the extreme positive day.

Dow One Year After Extreme Positive Move

On average the Dow is down the day after an extreme positive day as it is one week after, one month after and six months after such a day. Due to outlier concerns it is interesting to also note that the Dow is down the next day nearly 80% of the time and is down six months after nearly 75% of the time. Finally and of equal concern is the fact one year, six months, one month and one week out the greatest positive, in an absolute sense, is less than the greatest negative.

One year

Six Months

One Month

One Week

Next Day

Average

3%

-8%

-2%

-3%

-1%

Min

-46%

-33%

-20%

-21%

-5%

Max

38%

26%

14%

7%

5%

Percent Up

69%

25%

39%

28%

22%

Percent Down

31%

75%

61%

72%

78%

So far I have focused on the extreme up days, the final chart will serve as a reminder that extreme up days often fall near extreme down days.

DJIA 2000-2011 showing extreme up and down moves Has there been capitulation? It is hard to say. We have heard for months that central banks will be taking action, both in the United States and Europe, to fix the economic woes. Each time markets have performed well on the news but then quickly retreated as investors begin to realize that the fundamentals have not changed. You should not trade on Wednesday’s big move alone, you should first confirm that there has been a fundamental and positive change in the underlying economic system; only then can we be sure to have turned the corner.

Source: Big Market Moves Don't Necessarily Lead To Recovery