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Weekly Patterns
Are there Weekly Patterns in the stock market?

Do price pressures build up over the weekend that cause predictable distortions in the stock market on Monday? If the market is up or down a certain number of days in a row, what are the chances it will follow the trend the next day? Is the trend on Monday reversed on Tuesday? To find out, we loaded our S&P 500 data back to 1980, and ran a test. The results were this - the trend on Monday (either up or down) was reversed 55% of the time, a fairly significant result. This might tell us that the weekend causes an emotional buildup that moves the market an excessive amount on Monday, which is then corrected by Tuesday. Larger stocks, as represented by the Dow Jones Industrial Average, reversed slightly less - 54% of the time. Small stocks, as represented by the Russell 2000 (data back to 1990) showed the opposite pattern, going with the trend 60% of the time.

In the futures markets, the US dollar (data back to 1990) reversed 54% of the time, and the 30 year treasury bond (data back to 1987) reversed 53% of the time.

In recent years, the pattern has been less pronounced. In fact, if you study just the last two years, you get reversals of 53% in the Dow, 52% in the S&P 100, a continuation in the trend 50.5% of the time in the S&P 500 and a continuation 54% of the time in the Russell 2000 . The US dollar has reversed 58% of the time in the last two years, the CRB index 54% of the time, while other futures have shown continuation trends - 55% for gold, 54% for treasury bonds, and 55% for crude oil.

Next, we studied every possible price trend for the five day period. A nice Thursday trend emerged - if Monday and Tuesday went one direction, and then Wednesday reversed this trend, there was a 62% chance that Thursday would continue this reversal (we’ll represent this as XXOO, where X just means one direction, not necessarily up or down, and O means the other direction). If the first four days of the week all moved in the same direction (XXXX), Friday had a 61% chance of doing the same (XXXXX). And if Tuesday reversed Monday, but was then reversed by Wednesday, and the trend continued Thursday, there was a 63% chance that Friday would continue the trend set Wednesday (XOXXX).

The MetaStock formulas for the Tuesday calculation are included below. Formulas for the remaining days of the week build on these formulas, and are too extensive to include here (you need 2 formulas for Tuesday, 4 for Wednesday, 8 for Thursday, and 16 for Friday).

To build an exploration that looks for stocks with a high incidence of Tuesday reversal, simply put the formula "Tuesday % occurrence. of XX vs. XO" in a column in the Explorer, run an exploration on all of your securities, then sort by the aforementioned formula.

Tuesday XX Pattern

{ Looks for XX pattern, returns +1 if it finds it }
If(Ref(DayOfWeek(),-2) = 5 {2 days ago was Fri} AND
Ref(DayOfWeek(),-1) = 1 {Yesterday was Mon}
DayOfWeek() = 2 {Today is Tuesday}
AND { Either both days were up or down }
((Ref(CLOSE,-2) > Ref(CLOSE,-1) AND
Ref(CLOSE,-1) > CLOSE ) OR
(Ref(CLOSE,-2) < Ref(CLOSE,-1) AND
Ref(CLOSE,-1) < CLOSE )) ,
+1, { +1 if XX pattern }
0) { Otherwise 0 }


Tuesday XO Pattern

{ Looks for XO pattern, returns +1 if it finds it }
If(Ref(DayOfWeek(),-2) = 5 {2 days ago was Fri} AND
Ref(DayOfWeek(),-1) = 1 {Yesterday was Mon}
DayOfWeek() = 2 {Today is Tuesday}
AND { Tuesday is opposite direction of Monday }
((Ref(CLOSE,-2) > Ref(CLOSE,-1) AND
Ref(CLOSE,-1) < CLOSE ) OR
(Ref(CLOSE,-2) < Ref(CLOSE,-1) AND
Ref(CLOSE,-1) > CLOSE )) ,
+1, { +1 if XO pattern }
0) { Otherwise 0 }



Tuesday % occurrence. of XX vs. XO

{ Gives the % occurrence of XX (that Tuesday goes the same direction as Monday) }
Cum(Fml("Tuesday XX pattern"))/
(Cum(Fml("Tuesday XX pattern")) + Cum(Fml("Tuesday XO pattern")) ) * 100


Note that unchanged days, either Monday or Tuesday, are ignored in the calculations.

by John DeBry
Source / From: TOP

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