TripleScreenMethod.com
Bullish Outside Days:
Measure of Change in Market Psychology
Richard W. Miller, Ph.D. Published in May 2006
Issue of CANSLIM.net
Over the past few years, I’ve written here several times about chart
patterns that reflect market psychology: pullbacks & 21 day high and lows
(Oct/Nov ’04), the “hammer” candlestick (Mar ’05), pullbacks again (Sep/Oct
’05). As traders we’re interested because our vision is short term and
market psychology is all-important. As investors we should be interested
because these patterns affect our entry points. Today, I want to talk about
another pattern because it occurred last Thursday (4/27/06).
For must of us living on the Gulf Coast, an outside day (OD) is one spent in the
yard—all too frequently clearing up hurricane debris. In the market it’s
a day that makes both a higher high and a lower low than one or more prior
days. Over the last 1,589 trading days—encompassing the period between
01/03/00 and 4/28/06—the S&P made 162 ODs: 121 where its high/low limits
covered just the prior day, 21 the prior two days, 12 the prior three days,
and 8 the prior four or more days (email me for an Excel list if you’re
interested). Adding two further requirements (the OD’s close must be
greater than its open and the OD must be preceded by a pullback of at least
1 percent) reduces this group to 34 occurrences of bullish ODs. Chart I
highlights several occurring in the S&P over the past few months.
The market psychology of a bullish, OD is easily understood. Consider the
wide-range candle made in January this year. The S&P had been pulling
back for a few weeks. The day under the arrow opened up slightly, then
bearish pressure drove the index below the prior day low (as well as the
prior day lows of all 13 trading days shown). All of a sudden the bulls
stepped in and drove the index higher the rest of the day. It made a
higher high than the prior three days and went on to trigger a nice move
for the index over the next week and a half. Chart II, showing
15-minute candlesticks, highlights the change in psychology over the
past three days.
I’ll finish with a few statistics developed from the occurrences over
the past six years. If one defines the max 5-day return as the
difference between the open on the day following the OD and the high
then reached over the 5 days following the OD, 34 bullish ODs produced a
median gain of +21.55 points. If one defines the min 5-day return as
the difference between the open on the day following the OD and the low
then reached over the 5 days following the OD, these same 34 ODs
produced a median low of -8.45 points. To add some context, the
unrestricted, median 5-day gain for all 1,589 days was +14.55 points;
the unrestricted, median 5-day low was –14.98 points. Chart III gives
the dates and shows the magnitude of change for the 34 bullish, OD days.
You say,
“that’s all interesting, but what does it mean for next week?” Needless
to say, recent history would forecast the S&P to make further higher
highs over the next week: opened at 1309.72 on 4/28/06 and made a high
of 1316.04 for a gain of +6.32 points so far after 4/27/06’s OD (and a
high of 1317.21 on 5/02/06 for a gain of +7.49). In any event, watch
for future bullish, ODs. They don’t occur often, but they do mark
temporary changes in market psychology, and these changes can be used to
improve your entry points.
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