July 21/22, 2011 Alternate Changes Top-out at Six
Posted on July 24
Thursday ended the up-then-down series for the S&P500, but the DJIA and the NASDAQ stretched their streak to seven by losing -.34 percent and -.85 percent on Friday. Our attempt to connect these consecutive opposite changes to market trends, though, ends without discovering a consistent and stable relationship.
Yet the record of these days provides an insight: the chance that a decline follows an increase hovers near 50 percent and that rate remains the same for an increase after a decline. For example, in this series, that ratio was 56 percent after two seesaw days. On Thursday, after six up and down days, the probability of another change in direction came to 54 percent.
However, this constancy does not mean, necessarily that declines follow every gain, or that gains follow every gain. But it does reveal that a change in the direction of prices is as likely after, say five up and downs as after two.