A couple of weeks ago we looked at pullbacks from a high from a couple of different angles, such as the supposedly bearish Key Reversal Day from September 23rd, the downside follow-through the next day, and then multiple down days after becoming more than 20% stretched above the 200-day moving average.

Those studies suggested strongly that while the recent correction was disconcerting (they always are...), the historical probability was high that the S&P 500 would reach a new six-month high within a few weeks.

Various price vendors have slight discrepancies with data, but according to mine the S&P just barely missed closing at a new high by 0.17 points.  Given the move in the futures this morning, I think it's safe to fudge a bit, so let's say for now that this time it took 10 trading days to reach a new closing high with a maximum drawdown of -1.8%.  That's not too far off the averages from the precedents we studied.

So now let's look at those other instances when the S&P suffered a Key Reversal Day, showed some downside follow-through, and then recovered to close at a new six-month high again.

What we're looking at in the table below is the S&P's performance going forward after it recovered enough to close at a new high.

Well, not too much to go on here - the returns are pretty ho-hom.  There weren't any major declines over the next few months, just a couple of drops of 3%-5%, all of which recovered.  There was that one instance in August 1989 that just kind of hung in negative territory before a larger drop looking out six months, but other than that no big declines.

On the upside, it was a little more interesting.  Seven of the ten showed at least a +4% return at some point during the next three months, and longer-term the average did beat a random return.  But there isn't anything here that's jumping up and down saying what a wonderful (or terrible) development it is that the S&P has recovered from the supposed-to-be-so-negative Key Reversal Day.  I think the usefulness of that study has already served its purpose.

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