Before the open on Friday, Market History posted a 1-day bearish prediction based on the fact that historically, when the SPX has been beaten down despite rallying relatively strongly in the two days leading into a Friday, typically the SPX gives back its gains on that Friday. In fact, after opening higher on Friday, the S&P 500 started almost immediately moving lower and eventually finished -1.6% or 21.46 points down to finish at 1330.61. This posting is simply a continuation of Friday's query. I thought it would be interesting to ask what happens under these circumstances when in fact it does decline on Friday as predicted.
Is there any more predictive power to this query moving forward? It turns out, there is. Let us turn to the MIM...
Q: How has the S&P 500 performed in the past when, while trading below its 10-day average, it declines on Friday when the previous two days were big rallies?
A big rally is defined as a percentage gain of more than one standard deviation above the 30 day average percentage move.
A: According to the 10 previous occurrences of this event, omitting repeat occurrences within 10 trading days, SPX has shown a strong bearish edge that peaks one trading day after the event. Thus, the projected date for the peak of the bearish edge relative to the most recent occurrence of the event (Friday, Jan. 25, 2008) is Monday, 28 January 2008.
SPX declines in 100% of the cases (10 of 10) by an average of -1.3% relative to the close on the event date. The overall return of the 10 cases is -1.3%, which, based on the close of SPX on the event date (1330.61), provides a target price of 1313.31.
Ryan Soudan owns put option contracts on the SPY, an ETF designed to track movement in the SPX.
To view this event in EventEdge, click here.
Ryan Soudan is an analyst with MarketHistory.com.
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The S&P 500 - Suspecting a Sell-off? - January 25, 2008
