Global Equity Indexes: Short-Term Reversal Patterns

A number of traders have commented to me on how choppy the market conditions have become. A strong movement seems under way, and then it just as strongly reverses.

As a way of looking simply at recent trading conditions, I went back to the start of 2007 and investigated three-day returns as a function of the prior three-day returns. Specifically, I looked at what happens when the market is up jointly on a one- and three-day basis (uptrending) and when it is down jointly on a one- and three-day basis (downtrending).

When the S&P 500 Index (SPY) has been up for the past one and three days, the next three days average a loss of -.30% (80 occasions up, 83 down). When SPY has been down for the past one and three days, the next three days average a gain of .22% (82 up, 51 down). If traders wait several days for a trend to assert itself and then jump on board, they are likely to start in the hole.

When we look internationally at the Europe, Australasia, and Far East [EAFE] stocks (EFA), when those are up on a one- and three-day basis, the next three days average a loss of -.27% (76 occasions up, 80 down). When EFA has been down over the last one and three days, the next three days have averaged a gain of .09% (74 up, 65 down).

Finally, when we examine emerging market stocks (EEM), we find that when they are up on a one- and three-day basis, the next three sessions average a loss of -.31% (86 up, 81 down). When EEM has been down over the last one and three days, the next three days have averaged a gain of .69% (79 up, 45 down).

Across the globe, short-term trend following has been hazardous for traders' wealth. Even longer-term traders need to take these reversal patterns into account, if only to size positions and set stops for expected heat.

Comments

[adan:]

extremely interesting info - kinda identifies the type market we have had in general - thank you much!

2008 Aug 22 09:12 AM