Tuesday, April 30, 2013

Price Direction: A 50/50 Probability?

If you buy into the idea of probabilities and statistics and the fact that direction is a 50/50 probability. Then you would also agree that with enough occurrences that the up days vs down days should be about 50/50 (same concept for weeks or any other time frame). In the quick analysis I put together below it is evident that direction on any given day or week follows a normal distribution and JNJ’s current price run to the upside is an outlier way out on the right tail of the distribution curve with 17 consecutive up weeks.

Analysis Based On Weekly Closes (10 year data set)

Just on up weeks vs down weeks alone we are looking at a 5-6 standard deviation move which only happens 1/100 times. This coupled with the fact that price to the upside has also made similar moves away from the mean is what makes this trade so attractive. It’s just a numbers game.

Good Luck Trading!

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