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I once remember hearing that the market tends to retrace one-third of its previous days trend after a large move. I decided to put that theory to the test.

Yesterday, the S&P 500 lost 3.2%. This was the 38th time the index has done that since 1950. Here's an average of how those 37 previous sell-offs played out.

The average loss for the sell-off is 5.01%. After that, nearly every day is an up day. By the ninth day, the S&P 500 is down 3.48%, which is indeed, a retracement of about one-third.

The market still trends higher to the 17th day where it's down just 3.01%, or about a 40% retracement. At that point, the linger effects of the sell-off seem to dissolve.

Posted by edelfenbein at February 6, 2008 10:56 AM