We focus on the chain that started with last Wednesdays decline; it was followed by another loss on Thursday, then prices alternated up and down for the next three days. That chain, of +1/-1/+1/-2 changes, is the 13th repeat since the start of this century. Our diagram shows that nine of these closes struck at or near turning points. All of the other four happened while prices were on the rise, and those days were quite distant from market tops.
Further, on the following days, every one of the price changes during the two declines were large in the extreme. Losses generally exceeded 95 percent of all the other daily declines for the three Indices the DJIA, the NASDAQ, and the S&P500- we follow. Similarly, gains were big; however, exceeded only 90 percent of the near 1,600 losses since January 2000.
These results differ substantially for the two expansions. Whereas one of these three positve next day changes also approached the 95 percent level, the other two positives, as well as all the negative following day changes were far smaller than their average.
In sum, whereas prices rose as often as they declined on the following day, this average behavior fails as a useful predictor of tomorrows price given the large dispersion of each event from the central value. Yet, the prevalence of this pattern at turning points should be viewed as a yellow caution flag.
DJIA .84 percent
NASDAQ .43 percent
S&P500 .61 percent
