Are Strong or Weak Daily Closes Predictive?

When the stock market close is strong (weak) relative to the daily range, does it indicate pent-up buying (selling) demand? Should a trader follow the trend of the close the next day, position for a reversal or look for a better indicator? To investigate, we compare the position of the daily close for a broad market index relative to same-day high and low to the next-day return for the index. We also compare the five-day and ten-day average relative closes to the index return for the next five and ten days, respectively. Using daily high, low and close levels of the S&P 500 Index for the period 7/15/83 (the earliest without obvious errors available) through 6/15/11 (7,043 trading days), we find that: (more…)