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Short-Term Market Timing in the SPDR S&P 500 ETF

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An understanding of short-term market patterns can increase your trading profits.

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Let's break up the data a bit further so we can look at how the magnitude of the change up vs. down has impacted the average forward return. In the following graphic, we look at percent change from yesterday's close in segments (0 - 1%, 1 - 2%, 3%+, etc) and then look at average return over the next 24 hours:

SPY close-to-close return, if close today is down or up by:


The overall pattern is quite distinct: Larger percent gains for the current day on average lead to larger expected losses over the next 24 hours, and larger percent losses lead to larger average gains. Notice that these results mirror what we found in our prior article, when we applied this concept to just one day's worth of data.

Let's take the above concept and view it as a trading strategy. How has buying (or staying long) when the market is down greater than 1% and holding for 24 hours compared to buy and hold?

If today's close down is greater than 1% from yesterday's close, go long on today's close and exit at tomorow's close.


This graphic demonstrates how powerful these concepts can be. Note that in the above study, the "system" was only in the market about 15% of all trading days.
No positions in stocks mentioned.
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