Fireside Charts

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:

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:

NASDAQ Down Four Days In A Row

The NASDAQ Composite is down four consecutive days (“4-day cycle”). Thought I’d take a look back and see how returns were one to five days afterward.

Disclaimer: I realize 2-years is not enough backtest data to base a trade on. Small sample backtesting is done to give people an understanding of the odds.

Results the next day after the NASDAQ Comp was down four days in a row. Better than break even odds that it turned positive. Here is a look five days after:

Odds improved over the five days. I also noticed that the odds steadily increased from 1 to 5 days, so it would appear that odds favor the NASDAQ closing higher days after it has closed down four days in a row. Do note though that it is not 100% certain that the NASDAQ will close higher days out. Price is king. We could have one day up to break the cycle and four more days straight down.

Here are the trades five days out:

No huge losses and draw down is reasonable.

NASDAQ - Consecutive Up/Down Days

The NASDAQ Composite ($COMPQ) is also up five consecutive days as of Friday, November 23. Let’s look at the 2-year returns the day after.

Disclaimer: I realize 2-years is not a large enough sample size to base trades off. Small sample back testing is provided to give traders an idea of probabilities.

No better than 50/50 odds the day after with down days being larger than up days. Next day results:

You can see the exhaustion on the up days, but still not that great of odds for an “overbought” down day sell off. Let’s look out four days after the NASDAQ Comp was up five consecutive days:

Not much changed as far as odds, but unlike the S&P-500, the NASDAQ does shade toward the negative.

$SPX - Consecutive Up/Down Days

The S&P-500 ($SPX) is up for five consecutive days (close - previous close) as of the close on Friday, November 23. Below is a 2-year back test of how the $SPX performed the following trading day.

Disclaimer: I realize 2-years is not a large enough sample size to base trades off. Small sample back testing is provided to give traders an idea of probabilities.

Nine observations with 78% of them being negative the next day. Here are the next day results:

Two days positive, most days slightly negative, with two days being down over -1%. Nothing too massive though. Now let’s look out four days after the S&P-500 had five consecutive up days: