Home > Short-Term Trader > Stats On Price Reversal’s From A Multi-Month Low

Stats On Price Reversal’s From A Multi-Month Low

Below are some statistical observations by Jason Goepfert regarding Friday's reversal day.

 

Price Reversal From A Multi-Month Low

 

We've discussed the topic of price reversals many times over the years, and typically haven't been very enthused about them.  They're just not very reliable.  Sure, there are a hundred different conditions we can look for, any can pretty much massage the data any way we want to come up with an "appropriate" conclusion.

 

It's a slippery slope, so I prefer to keep the conditions to as few and common-sense as possible.  So basically, we're just going to look for any time the S&P futures closed at at least a three-month low (like Thursday) then dropped at least -1% the next day but rallied to close at least +1% higher (like Friday).

 

 

 

Price behavior following such reversals were short-term bullish, longer-term inconclusive.

 

The sweet spot for returns was four trading days later.  Here are the results:

 

Date

Return

Max

Loss

Max

Gain

08/09/82 1.0% -2.0% 1.1%
10/20/87 1.9% -9.8% 20.0%
10/16/89 1.7% -2.0% 2.2%
09/28/90 2.8% 0.0% 5.5%
10/28/97 2.3% -2.4% 2.3%
09/01/98 2.8% -4.5% 2.9%
07/24/02 7.3% -3.8% 7.9%
10/08/02 5.1% -4.2% 5.5%
10/10/02 7.5% 0.0% 10.2%
01/23/08 1.5% -1.4% 2.2%
09/16/08 0.0% -6.7% 5.4%
09/18/08 -0.4% -1.5% 6.8%
11/21/08 13.0% 0.0% 13.1%
Median 2.3% -2.0% 5.5%

 

Out of 13 occurrences, 11 led to positive returns, 1 was breakeven and one was a modest loss of -0.4%.  The rest averaged a median gain of more than +2%, with a reward nearly three times average the risk.

 

The worst part of the trade tended to be the first day after the reversal, which was up only 46% of the time.  If you bought that down day and held for three days, you would have had 7 winners out of 7 trades, with an average return of +4.5%.

 

Only 2 of the instances (10/08/02 and 09/16/08) saw the S&P trade below the low of the reversal bar over the next few days.  In both cases, the market ended up rebounding strongly immediately afterward, but that initial violation of the reversal low was no doubt cause for concern at the time.  As it would be if it happens again.

 

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Categories: Short-Term Trader
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