“We have tested every system under the sun and, amazingly, we have found one that actually works very well. It is a very good system…(under the realm of) trend following.

The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.”

~Paul Tudor Jones

Consecutive Up/Down Days: S&P500 and NASDAQ Composite

Most traders know by now that many U.S. Indexes and ETFs have closed down for five consecutive days or more as of Friday’s close (December 28, 2012). Below is a quick look at two main U.S. Indexes, the S&P-500 and the NASDAQ Composite, and how they performed 1-5 days after closing down 5-days in a row.

Note: Fiscal Cliff talks are in their 13th hour this weekend and could potentially impact market behavior on Monday, December 31st and the following week.

Disclaimer: I realize 2-years is not enough back-test data to base a trade on. Small sample back-testing is done to give traders an understanding of the odds and probabilities involved.

Let’s look at the S&P-500 first. Here’s a two year chart of consecutive up/down days:

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The Blue arrow points to the current streak. Yellow arrows note other times over the past 2-years that the S&P-500 has closed down more than 5-days. Here’s a look at how the S&P-500 has performed one day after being down 5-days in a row:

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DOW Bullish Percent Index (22 December 2012)

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DOW Bullish Percent Index is in a Bear Correction:

A Bear Correction signal occurs when the Bullish Percent Index is on a P&F sell signal, but advancing with a current column of X’s. Any advance remains a correction until there is a breakout to reverse the sell signal.

The PnF bear (sell) signal warrants caution, but the successful test of the 50 level has the current trend in favor of the bull.