Mini Lesson: Three Day Trends

Email from a reader:

Hello Toni,

A few years ago I wrote to you about the odds of making money after 3 up days in an intermediate down trend such as the environment we are now in. The same odds apply for 3 down days in intermediate up market. It basically north of 90% that 4th days will trade opposite or counter to last 3 days. I refered to Victor Sprandeo's book where has covered these statistics by going back over 80 years.......

This set up provided itself today after last 3 tradign days were up in an intermediate bear market. What a nice down day it was today!

Take care till next time..........

H.R.

Reply:

Very true! Excellent that you remembered this! I had no idea about the statistics, but I definitely appreciate you passing them along, I just know from my own observations that it was awfully close to 100%. My guess would be that since he quoted 90%, what is probably likely is that the intraday corrections were longer in the other 10%. The rule that I use is that it is near 100% based upon days where the move holds a 15 minute 20 period simple moving average zone. If it were to hold perhaps a 50 sma or a 30 min 20 sma, then these are where there will tend to be more exceptions. With the 15 minute 20 sma rule, the average move is 2-3 days holding the 15 minute 20 sma, followed by a break of that moving average without the market being able to maintain such a trend past that third day.

Keep in mind that I am looking at days based upon when a trend move starts, so if it starts at noon, then it would be three days from that time. The average tends to be just over 2 though, which, if it begins on the afternoon of one day can lead to a positive close that day, following through into a positive close the next day for a day and a half total, and then giving a third day of a higher close even though it's really just 2-2.5 days total when looked at on an hourly basis.

All my best,
Toni