Market Measures

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Reversals

Market Measures

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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.

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