According to our study, extreme 2 Standard Deviation reversals a day after a 2 SD move is independent. However, when we increased the timeframe, chances of price reversal would increase, which implies contrarian trading opportunities.
We tested if the stock would “fill the gap” in 1 Day, 5 Days, or 45 Days after a 2 SD move on one year price data of all S&P companies, and the results show that there is a 5% chance that the gaps are filled in 1 day, which aligns with normal distribution suggestion for random moves.
There is a 22% and 61% chance that the gaps are filled in 5 Days or 45 Days, respectively. The increasing probability of filling the gaps with the increase of timeframe shows an increased chance of price reversal and contrarian trading when timeframe increases.
Tune in as Tom and Tony examine this studio in more detail!