Strong Stock Market Return Reversals and Future Trend
October 27, 2022 - 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: Keep Reading