|On April 20, the Dow Jones Industrial Average (DJIA) fell almost 290 points. Triple-digit days have become almost normal these days in the eyes of many investors. But a move of more than 3% in a single day is still something that gets the attention of even most the seasoned trader. Common wisdom says to expect a rebound from a day like this. Testing shows that rebound may be short-lived.|
|Going back to 1920, there have been only 48 days when the DJIA declined by at least 3.5%. Eighteen of those days have come in the past 16 months, so this is definitely a historically volatile period in the market. Looking at performance in the days after a decline of that magnitude, we see that the market is higher 60.4% of the time the next day. That is some evidence supporting a rebound.|
|Two days after such a decline, the market is higher 62.8% of the time. However, after three days the market is usually lower, showing gains only 45.9% of the time. Five trading days later, the market has been higher only 42.9% of the time.|
|Looking at a longer time frame, a month later the market has been higher only 51.9% of the time. This is well below average.|
|History shows very few instances of a large one-day decline after large gains in the previous month. There are only five instances where the market lost at least 2% after showing gains of at least 10% in the previous month. It is not reasonable to draw conclusions from a sample size that small. This again shows how unusual the current market action is. |
Conservative traders may want to lighten up on long positions, given the history of market movements after a large one-day decline.
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