The Mysterious Three-Day Trend

April 14, 2009

By Bill Singer

For some reason, a lot of folks are intrigued by my recent analysis of the Three-Day-Down trend.  As I noted in my earlier blogs on the issue

http://www.brokeandbroker.com/index.php?a=blog&id=161

http://www.brokeandbroker.com/index.php?a=blog&id=164

I was annoyed that the boo-birds were flocking to the media with dire predictions based upon seemingly little more than regurgitated fears.  My point was to try and bring some objective data into the debate.  Pointedly, I am NOT predicting a Bull Market or a continuation of an uptrend.  I am merely hoping to introduce a thermometer -- a device that does not predict the temperature but records it.  You do with the data what you will.

In analyzing Year-to-Date market data, I took the most popular index: the Dow Jones Industrial Average ("DJIA"). Personally, I am an S&P 500 fan, but I chose to work with what is popularly referenced as the measure of the stock market. 

Now, for a few benchmarks. Since January 6, 2009, the DJIA is down (as of the close on April 13, 2009) 10.62%, and its low water mark for that period was down 27.38% (March 9, 2009).

The chart below adds up the number of consecutive DOWN or UP days based upon the DJIA's closing price and compiles each trend as a Trend number.  At the conclusion of a given Trend, the sum is added to the Cumulative Trend.  The first Cumulative Trend entry was on January 14, 2009, when we completed five DOWN days and the entry for that trend is -5. On January 16th, after the completion of a two-day UP trend, we adjusted the Cumulative Trend number to -3.  For the time period followed in the chart, the lowest Cumulative Trend is -2 on January 28,  and the highest is -13 on March 9, 2009.

The last three-day DOWN trend for the period covered was on February 23, 2009. A subsequent five-day DOWN trend ended on March 3, 2009.

SOME OBSERVATIONS -- NOT PREDICTIONS

From March 4-9, we had a four trading day period in which there were four individual days of one-day trends. That pattern would tend to indicate investor indecision and a lack of overall direction.  That block is all the more meaningful because it ended with the March 9th nadir and now suggests that it was a turning point in investor sentiment.  Whether it was simply a short, interim, or long-term sentiment change will only be known in hindsight.  However, beyond debate is that we have regained some 17% of the DJIA's value in the ensuing trading days.

Since March 3, 2009, the DJIA has not had more than a two-day DOWN trend.  For that same period, there have been two four-day UP trends but no three-day UP trends. I believe that three day trends are meaningful. In bearish markets, I think that investors view that second-day of lesser value as a confirmation that things aren't that good and if folks are thinking of taking profits, the second day's drop may prompt position and portfolio liquidation.  If sentiment is particularly bad, that three-day trend may blossom into an even longer one and the subsequent up-days may be limited to one or two day trends.  In more bullish markets, I think that investors view the second-day of lesser value as an opportunity to pick up stocks at more favorable values and will enter limit and market orders to that effect.  Again, my view is that this is simply a thermometer measuring investor sentiment.  There is nothing profound here, and there is no reason that every market commentary be so.

The more interesting issue is why there have been no three-day trends to the upside since March 3rd.  We have had one-, two-, and four-day UP trends, but no threes and nothing longer. The last three-day UP trend on our chart was January 26, 27, and 28. Similarly, there isn't a single four-day DOWN trend on the chart -- there are one, two, three, and greater, but not solely a four-day block.

Okay, so that's it.  I'm waiting for a three-day or a four-day DOWN or a three-day UP trend. Not shorter and not longer.  Give me one of those recent missing links and I'll have to stop and look at the data and figure out what's what. Until then, I see no reason to panic and see little evidence of any major change in the recent trading pattern.

Ain't numbers fun!

DATE DJIA P(L) TICK TREND Cumulative TREND
14-Apr-09
13-Apr-09 8,057.81 -10.619% DOWN   -6
9-Apr-09 8,083.38 -10.335% UP 2 -6
8-Apr-09 7,837.11 -13.067% UP   -8
7-Apr-09 7,789.56 -13.594% DOWN -2 -8
6-Apr-09 7,975.85 -11.528% DOWN   -6
3-Apr-09 8,017.59 -11.065% UP 4 -6
2-Apr-09 7,978.08 -11.503% UP   -10
1-Apr-09 7,761.60 -13.904% UP   -10
31-Mar-09 7,608.92 -15.598% UP   -10
30-Mar-09 7,522.02 -16.562% DOWN -2 -10
27-Mar-09 7,776.18 -13.743% DOWN   -8
26-Mar-09 7,924.56 -12.097% UP 2 -8
25-Mar-09 7,749.81 -14.035% UP   -10
24-Mar-09 7,660.21 -15.029% DOWN -1 -10
23-Mar-09 7,775.86 -13.746% UP 1 -9
20-Mar-09 7,278.38 -19.265% DOWN -2 -10
19-Mar-09 7,400.80 -17.907% DOWN   -8
18-Mar-09 7,486.58 -16.955% UP 2 -8
17-Mar-09 7,395.70 -17.963% UP   -10
16-Mar-09 7,216.97 -19.946% DOWN -1 -10
13-Mar-09 7,223.98 -19.868% UP 4 -9
12-Mar-09 7,170.06 -20.466% UP   -13
11-Mar-09 6,930.40 -23.125% UP   -13
10-Mar-09 6,926.49 -23.168% UP   -13
9-Mar-09 6,547.05 -27.377% DOWN -1 -13 4/d of 1/d
6-Mar-09 6,626.94 -26.491% UP 1 -12  
5-Mar-09 6,594.44 -26.851% DOWN -1 -13  
4-Mar-09 6,875.84 -23.730% UP 1 -12  
3-Mar-09 6,726.02 -25.392% DOWN -5 -13 5/d DOWN
2-Mar-09 6,763.29 -24.978% DOWN   -8  
27-Feb-09 7,062.93 -21.654% DOWN   -8  
26-Feb-09 7,182.08 -20.333% DOWN   -8  
25-Feb-09 7,270.89 -19.348% DOWN   -8  
24-Feb-09 7,350.94 -18.460% UP 1 -8  
23-Feb-09 7,114.78 -21.079% DOWN -3 -9 3/d DOWN
20-Feb-09 7,365.67 -18.296% DOWN   -6  
19-Feb-09 7,465.95 -17.184% DOWN   -6  
18-Feb-09 7,555.63 -16.189% UP 1 -6
17-Feb-09 7,552.60 -16.223% DOWN -3 -7
13-Feb-09 7,850.41 -12.919% DOWN   -4
12-Feb-09 7,932.76 -12.006% DOWN   -4
11-Feb-09 7,939.53 -11.931% UP 1 -4
10-Feb-09 7,888.88 -12.493% DOWN -2 -5
9-Feb-09 8,270.87 -8.255% DOWN   -3
6-Feb-09 8,280.59 -8.148% UP 2 -3
5-Feb-09 8,063.07 -10.560% UP   -5
4-Feb-09 7,956.66 -11.741% DOWN -1 -5
3-Feb-09 8,078.36 -10.391% UP 1 -4
2-Feb-09 7,936.83 -11.961% DOWN -3 -5
30-Jan-09 8,000.86 -11.250% DOWN   -2
29-Jan-09 8,149.01 -9.607% DOWN   -2
28-Jan-09 8,375.45 -7.095% UP 3 -2
27-Jan-09 8,174.73 -9.322% UP   -5
26-Jan-09 8,116.03 -9.973% UP   -5
23-Jan-09 8,077.56 -10.400% DOWN -2 -5
22-Jan-09 8,122.80 -9.898% DOWN   -3
21-Jan-09 8,228.10 -8.730% UP 1 -3
20-Jan-09 7,949.09 -11.825% DOWN -1 -4
16-Jan-09 8,281.22 -8.141% UP 2 -3
15-Jan-09 8,212.49 -8.903% UP   -5
14-Jan-09 8,200.14 -9.040% DOWN -5 -5
13-Jan-09 8,448.56 -6.284% DOWN   0
12-Jan-09 8,473.97 -6.002% DOWN   0
9-Jan-09 8,599.18 -4.614% DOWN   0
8-Jan-09 8,742.46 -3.024% DOWN   0
7-Jan-09 8,769.70 -2.722% DOWN   0
6-Jan-09 9,015.10

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