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Dow - Bearish Outlook 
Monday, March 2, 2009
By Anthony Kolton
After a 'big' 3.3% rally on Tuesday of last week, which almost made up for the big -3.4% decline on Monday, the day before, the stock market sold off on Wednesday, Thursday and Friday, with declines in excess of 1.0% each day. The tally for the week was a 4.1% decline for the week, and closed the month with the biggest one month decline (-11.7%) in the month of February since 1933, when it lost 15.6%.
The Dow made haste to trade today below the closely watched 7,000 level, and has reached a low so far of 6,898.70 after a brief attempt at a rally from the opening lows. It appears to be heading lower and this query suggests that the historical record for a market resembling the moves of the last two weeks could send us into a 1987-like one-day crash today.
Q: How has the market behaved in the past following a Friday where the Dow was down for the third day in a row where each of the days of decline was more than 0.5%, was down four days ago, five days ago, six days ago and rallied 7 days ago?
A: According to the 7 previous occurrences of this event, EventEdge indicates that DJIA.A has shown a somewhat bearish edge that peaks 21 trading days after the event. Thus, the projected date for the peak of the bearish edge relative to the current event date (Friday, 27 February 2009) is Monday, 30 March 2009. DJIA.A declines in 86% of the cases (6 of 7) by an average of -6.1% relative to the close on the event date. The average of the 1 rally is 3.7%. The overall return of the 7 cases is -4.7%, which, based on the close of DJIA.A on the event date (7062.93), provides a target price of 6730.97.
But what's especially notable about this set of historical events is that the very next day in the 1987 occurrence the Dow dropped 22.6%.
Anthony Kolton3 is president of Logical Information Machines4 and Markethistory.com, Inc.
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Let variable values:
@ = DJIA_ACT
theEvent = IF
Date is Friday
AND
DJIA is down more than 0.5 %
repeated for the previous 2 and current day
AND 4 days ago @ is down
AND 5 days ago @ is down
AND 6 days ago @ is down
AND 7 days ago @ is up
THEN 1
ENDIF
Date Day t+1 t+5 t+10 t+15 t+21
09/13/1901 Fri 4.1 0.5 -0.9 -5.2 -2.9
09/01/1905 Fri 1.3 -0.8 2.2 1.7 3.7
11/19/1920 Fri 5.5 4.2 4.9 -3.6 -8.7
09/26/1930 Fri -2.4 0.4 -6.9 -9.4 -8.6
01/13/1939 Fri 1.2 1.8 -5.2 -2.0 -1.6
03/25/1977 Fri -0.3 -0.2 -0.5 1.5 -1.4
10/16/1987 Fri -22.6 -13.2 -11.3 -12.8 -13.2
02/27/2009 Fri NaN NaN NaN NaN NaN
Avg -1.9 -1.0 -2.5 -4.3 -4.7
AvgPos 3.0 1.7 3.5 1.6 3.7
AvgNeg -8.4 -4.7 -5.0 -6.6 -6.1
PctPos 57.1 57.1 28.6 28.6 14.3
PctNeg 42.9 42.9 71.4 71.4 85.7
Maximum 5.5 4.2 4.9 1.7 3.7
Minimum -22.6 -13.2 -11.3 -12.8 -13.2
StdDev 9.5 5.6 5.6 5.4 5.8
ZStat -0.2 -0.2 -0.5 -0.8 -0.8
Variance 90.5 31.3 31.2 29.1 33.1
8 Occurrences |
Comments:
Web Address of this trading idea:
Links:
2 http://www.markethistory.com/content/analog/analog.html?ticker=DJIA.A
3 http://www.markethistory.com/staff/detail.html?s=kolton
4 http://www.lim.com/