N-tuple S&P patterns across decades, 1950‐2011

Numerous studies have analyzed the movements of the S&P 500 index using several methodologies such as technical analysis, econometric modeling, time series techniques and theories from behavioral finance. In this paper we take a novel approach. We use daily closing prices for the S&P 500 index for a very long period from 1/3/1950 to 7/19/2011 for a total of 15,488 daily observations. We then investigate the up and down movements and their combinations for 1–7 days giving us multiple possible patterns for over six decades. Some patterns of each type are more dominant across decades. We split the data into training and validation sets and then select the dominant patterns to build conditional forecasts in several ways, including using a decision tree methodology. The best model is correct 51 % of the time on the validation set when forecasting a down day, and 61 % when forecasting an up day. We show that certain conditional forecasts outperform the unconditional random walk model.