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Two Sides to Every Coin

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What happens when the "counter-trend Tuesday" chatter gets too crowded? Yesterday's late day weakness speaks for itself. The fact that yesterday closed lower despite historical patterns suggesting otherwise, raises the potential for an "outlier" move. Today I'm going to show the potential for both sides of the coin.

If we just look at SP futures performance on a Wednesday where Tuesday closed lower and the preceding two days closed down more than 1%, then the bias is again quite bullish for the day's close. There were eight occurrences and the next day closed higher in all eight. This is slightly different than yesterday's query in that I removed the stipulation that the down 1% days failed to trade positive. The results are listed below:

Given yesterday's late day weakness and lower close, today is a perfect reminder that PAST PERFORMANCE DOES NOT INDICATE FUTURE RESULTS. When markets don't do what they should do, they are often talking.

This brings us to the "outlier" potential. The table above clearly shows a bullish bias to the day but here's the other side of the coin. The SP futures posted an inside day yesterday and posted a new 30 day low close. When this pattern follows a breakaway gap (the day's high is lower than the prior day's low), I found only one occurrence and the next three days were decidedly bearish. To illustrate the degree of risk currently in the market, I've provided the chart of both today's SP future and the chart of the occurrence just mentioned.

What does all this mean? I present these historical probabilities with the intent of helping to provide a "roadmap" for the day's trade. It's important to understand the risks in the market and yesterday's late day weakness clearly raises the "risk" element despite a historically upside bias for the day's trade.

Past performance does not indicate future results.

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No positions in stocks mentioned.

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