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Strong Stock Market Return Reversals and Future Trend

Steve LeCompte | | Posted in: Technical Trading

Are days with strong stock market return reversals predictive of the future trend? To check, we we use daily opens, lows, highs and closes of the S&P 500 Index to define the following:

  • Reversal - days with both (1) lows more than 1% below the open and (2) highs more than 1% above the open.
  • Reversal Down - Reversal days for which the close is less than 0.25% above the low.
  • Reversal Up - Reversal days for which the close is less than 0.25% below the high.

These thresholds are arbitrary but generate enough signals for some testing. For each group we plot cumulative index returns over the next 21 trading days. Using S&P 500 Index daily levels as specified during January 1962 (limited by availability of daily lows and highs) through September 2022 (15,293 trading days), we find that:

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