Market Measures

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Closing at Highs or Lows: Is the Trend Your Friend?

Market Measures

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In this Market Measure segment, Tom and Tony recognize market randomness. While acknowledging the positive drift in the market, they see smaller time frames and market movement as random.

So called “industry experts” claim to see opportunity in these smaller time frames, but are there “tells?” Will a particular market rally again tomorrow if it closes at its highs today, or fall again if closing on the lows of today?

The Research Team did a study in GLD, SPY, and TLT; from 2004, 1993, and 2002 to present (respectively). They analyzed days where The ETFs closed within $0.05 of that day’s high (on an up day) and also when The ETF closed within $0.05 of that day’s low (on a down day). They observed the direction and magnitude of the next day’s movement compared to the whole dataset (all days).

Looking at GLD, the underlying did not show signs of “trending” after closing on a high or low. GLD more often saw a reversion to the mean after closing on a low, though the prediction is that with enough occurrences, GLD would likely be 50/50.

In SPY, there was little variation. After closing on the highs or lows, the magnitudes of the moves were just slightly lower after those days.

In TLT, there were similar results to SPY and GLD. After closing on its highs, TLT saw slightly more down days, however, as with GLD, this would even out with more occurrences.

From these observations, there was no prevalent evidence that closing near a high or low gave any indication of the next day’s movement. There were no strong correlations between up (or down) moves and with an extended up (or down) the next day. In fact, there often was a “bounce” in the market.

For more on market memory, watch this episode of Market Measures.

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