Posts filed under “Markets”
The question came up yesterday about the technical formation known as an "outside day."
An outside day occurs when one day’s high is higher than the previous day’s high, and its low is lower than the previous day’s low. This is often taken as a signal that the market is about to make a move in the direction of the close.
However, negative outside days are less than a conclusive formation, according to the Encyclopedia of Chart Formations (Bulkowski). The expected response to an outside day with a downside breakout (like yesterday’s) — more selling — has a 42% failure rate.
That’s rather inconclusive.
Bulkowski did a study of 510 outside day formations in 51 stocks over 5 years. He found the pattern, at least for individual names, was fairly common. The stocks failed to move in the predicted pattern 4 out of 10 instances. A pattern is considered a poor predictor if it fails 2 out of 10 times. So the outside day with a downside breakout turns out to be little better than a 50/50 predictor — a toss of a coin.
Some surprising tidbits: The best performing (negative) outside days turn out to be those with lower volume; Yesterday’s volume (even backing out Sirius Radio) was high.
Also, the smaller the formation, the more powerful. Tight outside days with an upside breakout are like coiled springs; The data was inconclusive regarding downside breakouts.
Nasdaq’s recent action (before the outside day) does show heavy churn, suggesting a tiring market. That is consistent with yesterday’s conclusion that additional consolidation and backfilling is required before the next significant leg up.
Way back in October 2003, we looked at master technical analyst George Lindsay’s repetitive chart pattern, Three Peaks and the Domed House. That version showed a fairly prescient call by Ned Davis, before the January ’04 top. That was then, this is now. Its time to revisit the pattern, this time via Jeff Hirsch of…Read More
In the midst of the recent big drop in oil – which is likely at least partly due to forced/margin selling – there is an interesting point to be considered.
Writing on the financial website Street Insights, Richard Ritholtz [Editor: no relation -- as far as I know] made the following comments today:
· It’s too early to write off the winter even though the weather has been quite mild in the Northeast and Midwest to date.
· Heating oil inventory is still at a low absolute level, although it is clearly in a building mode over the next weeks.
· The market experienced significant long liquidation yesterday as several large funds locked in their profit for the year; December 1st clearly signaled that year end is not far away.
· Based on information from several private forecasters, I believe that the overall winter temperatures from Dec. 21- Mar. 21 will be average to below normal even, though the November through early December temperatures have been milder.
As to the weather (ok…cue the “Let’s Make Fun of Rob Fraim” theme music here) here is something of interest (or fun if nothing else):
The Old Farmer’s Almanac has a noteworthy record for medium-to-longer range weather forecasts.
Oh, I know you’re laughing at me now. You’d rather pay attention to Skippy the Weatherman on your local Accu-Weather at 6:00 who can’t, for Pete’s sake figure out whether it’s going to rain tomorrow. (And who each year predicts 4 huge snowstorms that never materialize and misses on the blizzard that blindsides you.)