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Outside Days



The SP formed an outside day with a lower close yesterday by making a higher high and lower low. Doesn't this forecast lower prices? Not really. Although an outside bar can lead to further downside, the pattern has a tendency to trap shorts and generate a short-term rally. In the very near term, we can cite Monday's action as an example. Recall the SP posted an outside day with lower close on Friday as well. Then on Monday the SP closed up .5%. Since we've had two outside days with lower closes over the last three days, here's a few analogs:

  • The SP futures open above prior day's high and close below prior day's low: Since the inception of the futes, there were 72 occurrences. The results are too mixed to draw any conclusion but we can at least dispel the myth that outside bars are a good sell signal. The next day closed higher 56% of the time and the SP was higher 3 days later 60% of the time.

  • The SP recorded an outside day with lower close in two of the last three days. I limited this query to patterns that mirrored the last three daily bars (see highlight below). There were only ten occurrences but the forward results were consistently bullish. The SP futures were higher three days later in all but one and the lone exception was down just -.14% (table is in %).

From this we can safely say that sales should not be made based solely on an outside day pattern (it's just one piece of a larger puzzle). And given the upside bias associated with tomorrow's action, there's a good chance that Snapper will show up after a downside probe (note the average next day low from table above is -.48%). Upside bias for tomorrow? The Thursday before the March expiration has been quite strong. The SP futures finished the day in positive territory 18 of the last 22 years with the worst decline just -.58%.

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