When stocks are moving gently from one day to the next, there is often no discernible pattern. However when they start rockin’ and rollin’ one direction or the other, they show certain similarities.
I’m always curious how stocks behave when they show a significant drop, or when they pop upward unexpectedly. I ran some simple statistics and noticed a couple of things.
First, I decided to look at what happens when stocks drop significantly. Rather than look at a fixed percentage, I instead used Average True Range of the stock. This shows the average price movement over the previous days, and is a measure of volatility. I took the ATR(20) before a drop, and corralled all the stocks that fell at least 3x the previous day’s ATR(20) value. I also looked at stocks that dropped at least 5x the previous ATR. Here’s a visual:
I then recorded the percent gain or loss for each day’s close following the drop, for five days after. This resulted in thousands of rows of data, but you know I gladly suffer through spreadsheet hell so that you can have pretty graphs.
It turns out there’s a clear pattern: