After hitting an all-time high last Wednesday, the Philadelphia Semiconductor Index (SOX) saw a pretty rare occurrence of back to back inside days on Thursday and Friday.  For those unfamiliar with the term, an inside day occurs when the intraday daily price range of a security is completely ‘inside’ the range of the prior day i.e., the day’s intraday high is lower than the prior day’s intraday high and the intraday low is higher than the prior day’s intraday low.  For more information on the term, you can check out a discussion of it on Investopedia.

In yesterday’s trading, the SOX broke the pattern of inside days as the intraday low was lower than the intraday low from the prior Friday.  What was especially noteworthy about last week’s inside days is that they were back to back and followed a day where the SOX traded to a 52-week high.  In the entire history of the SOX daying back to 1994, there have only been four other times where there has been a similar setup.  According to technicians, an inside day is generally considered to be a pause in a continuation pattern, in that the market typically follows the direction it was moving before the inside day.  As most chart-watchers are well aware, however, just because a technical pattern suggests the price of a security will move in one direction doesn’t mean it always does.

In order to put the technical pattern to the test, in the charts below we have shown each of the prior four occurrences of back to back inside days in the SOX index that followed a day where the index hit a 52-week high.  Given that the SOX rallied to a 52-week high before the back to back inside days, technicals would suggest that the SOX would resume its rally following these inside days.  Before going any further, though, we would stress that with a sample size of just four, we wouldn’t read too much into the results.

The first two occurrences of back to back inside days following a 52-week high for the SOX occurred within three weeks of each other in December 1999 (12/29/99) and January 2000 (1/19/00).  Here you can read into what happened next as both bullish and bearish.  For the bulls out there, the SOX rallied more than 60% in the six months that followed the first occurrence and was even up much more than that four months later.  From the high in March 2000, though, it was all downhill from there as the dot-com bubble popped and the Nasdaq cratered.  One year later, the SOX was lower than it was at the time of each of the first two occurrences by 18% and 11%, respectively.

The next time the SOX saw back to back inside days following a 52-week high was in July 2005, and here the SOX’s performance was just as mixed.  After the inside days, the SOX saw a short-term peak shortly thereafter, but it more than rebounded in the six months that followed.  Once again, though, a year later, the SOX was 12% lower than it was at the time of the original inside days.

Finally, the most recent occurrence prior to last week’s came in July 2007.  In this period, the market never saw a higher closing print than its 52-week high from before the back to back inside days.  A week later, the SOX was down 6%, and one year later it was down 33%.  In fact, it wasn’t until January 2014, more than six years later, that the SOX ever closed above that level again.

Again, four occurrences isn’t exactly a large sample size, but from a broader picture, we also looked at the performance of the SOX following all back to back inside days and found that its performance was notably better following occurrences where the market was down leading up to them rather than up.  That would suggest that for back to back inside days at least, the pattern is more of a reversal than a continuation pattern. Start a two-week free trial to Bespoke Institutional to stay on top of all the latest market trends using our research and investor tools.

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