Blog - Investing Notes

April 16, 2008 - Trading After N-day Highs and Lows

Is there a predictable market reaction to stocks reaching round-number n-day highs and lows? In their November 2007 paper entitled "Highs and Lows: A Behavioral and Technical Analysis", Bruce Mizrach and Susan Weerts investigate whether there are systematic trading behaviors for stocks posting 10-day, 25-day, 50-day, 100-day, 150-day, 200-day and 52-week highs and lows. Using daily price data for 488 Nasdaq stocks and 361 NYSE stocks over the period January 1993 through October 2003, they conclude that:

• Turnover rises upon reaching round-number n-day highs and lows, increasing with the size of the number. Elevated trading persists for two weeks or more. These findings are robust to market volume, returns and company news (earnings, dividends and analyst rating changes).
• For round-number n-day highs:
  • Average abnormal (relative to the risk-free rate) returns on the day of the high range from 2.7% for 52-week highs to 3.4% for 50-day highs.
  • On the day after a high, there is on average a modest one-day return reversal of about -0.5%.
  • There are no reliable abnormal returns on subsequent days.
• For round-number n-day lows:
  • Average abnormal returns on the day of the low range from -2.3% for 10-day lows to -3.7% for 52-week lows.
  • There is on average a strong return reversal for up to six days after lows.
  • Average abnormal returns for going long after a round-number n-day low range from 0.46% for 10-day lows to 1.2% for 52-week lows.

The following chart, taken from the paper, tracks average abnormal (relative to the risk-free rate) returns by trading day for 52-week highs from the day of the high through ten trading days later, with a 95% confidence interval indicated by the dark bands. The shape of the curve is similar for all round-number n-day highs tested.

The next chart, also from the paper, tracks average abnormal returns by trading day for 52-week lows from the day of the low through ten trading days later, with a 95% confidence interval indicated by the dark bands. The shape of the curve is similar for all round-number n-day lows tested.

In summary, round-number n-day highs and lows on average trigger elevated trading volume and return reversals. The average reversal after lows (highs) is relatively large (small) and may be tradable (is probably not tradable).

For related research, see Blog Synthesis: Some Trading Indicators.