The Tuesday Reversal Trading Strategy (S&P 500 – SPY)
Last Updated on April 18, 2023
Some days back I wrote about daily seasonality in the S&P 500. As a proxy, I use SPY, an ETF. As I have been trading for some years I have noticed there is often a reversal on Tuesdays. Actually, this “fact” is well researched over the years. However, I want to measure it myself using my own parameters. Let’s test at reversal trading strategy.
The Tuesday Reversal Trading Strategy (S&P 500 – SPY)
As you can see from the first article, Tuesdays are indeed the best day of the week over the last 2.5 years. Tuesdays are very good no matter what has happened before Tuesdays. The last 2.5 years have been much better than the years before 2010.
Here are some potential trading tactics:
If today is Monday, the close is lower than the previous day (Friday), go long at the close. Exit on tomorrow’s close:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | 0.09 | 0.11 | -0.06 | -0.11 | 0.12 |
| #Fills | 51 | 55 | 61 | 56 | 54 |
| #wins | 26 | 33 | 31 | 28 | 31 |
| Max | 4.66 | 2.82 | 4.49 | 2.49 | 4.40 |
| Min | -3.09 | -2.95 | -3.77 | -2.62 | -6.51 |
| Avg. max next 3 days | 1.49 | 1.22 | 1.33 | 1.37 | 1.77 |
| Avg. min next 3 days | -1.55 | -1.68 | -1.59 | -1.62 | -1.32 |
The column Monday consists of the average gain from the close on Monday until the close on Tuesday.
If there are two down days in a row we get these results:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | -0.06 | 0.10 | -0.65 | -0.13 | 0.23 |
| #Fills | 22 | 27 | 22 | 29 | 28 |
| #wins | 8 | 16 | 6 | 15 | 16 |
| Max | 4.66 | 2.82 | 1.32 | 2.06 | 4.40 |
| Min | -2.78 | -2.95 | -3.77 | -2.52 | -6.51 |
| Avg. max next 3 days | 1.52 | 1.35 | 0.97 | 1.48 | 2.09 |
| Avg. min next 3 days | -1.62 | -1.60 | -2.10 | -1.56 | -1.32 |
Now, if today is an up day, we get the following results:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | 0.18 | -0.04 | 0.11 | -0.01 | 0.02 |
| #Fills | 63 | 74 | 69 | 72 | 72 |
| #wins | 38 | 34 | 41 | 46 | 40 |
| Max | 3.30 | 4.11 | 3.49 | 1.90 | 2.87 |
| Min | -2.35 | -4.42 | -4.69 | -3.52 | -2.00 |
| Avg. max next 3 days | 1.26 | 1.22 | 1.20 | 1.11 | 1.14 |
| Avg. min next 3 days | -1.36 | -1.34 | -1.33 | -1.20 | -1.20 |
If today is the second day in a row up, we get the following:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | 0.08 | -0.14 | 0.16 | -0.07 | 0.00 |
| #Fills | 37 | 42 | 35 | 41 | 45 |
| #wins | 21 | 18 | 22 | 24 | 25 |
| Max | 1.81 | 4.11 | 1.93 | 1.48 | 2.12 |
| Min | -1.95 | -3.69 | -2.20 | -3.52 | -2.00 |
| Avg. max next 3 days | 1.03 | 1.00 | 1.33 | 0.97 | 1.06 |
| Avg. min next 3 days | -1.13 | -1.47 | -0.98 | -1.24 | -1.08 |
What about intraday strategies?
If Monday is a down day (compared to Friday’s close), then go long at tomorrow’s open if the market opens down (from Tuesday’s open). Exit on close:
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | -0.12 | 0.17 | -0.13 | -0.11 | 0.00 |
| #Fills | 21 | 31 | 25 | 27 | 25 |
| #wins | 12 | 14 | 11 | 17 | 12 |
| Max | 1.92 | 3.68 | 0.99 | 1.18 | 3.02 |
| Min | -3.98 | -1.82 | -1.54 | -2.86 | -1.79 |
| Avg. max next 3 days | 1.65 | 1.59 | 1.07 | 1.48 | 2.26 |
| Avg. min next 3 days | -1.34 | -1.47 | -1.83 | -1.49 | -1.32 |
Tuesday is the only profitable!
What happens if the market opens up?
| Monday | Tuesday | Wednesday | Thursday | Friday | |
| Average | -0.10 | 0.28 | 0.16 | -0.04 | -0.15 |
| #Fills | 27 | 29 | 29 | 32 | 30 |
| #wins | 14 | 18 | 18 | 14 | 12 |
| Max | 1.61 | 2.99 | 2.08 | 3.59 | 1.24 |
| Min | -2.12 | -1.45 | -2.99 | -2.36 | -1.51 |
| Avg. max next 3 days | 1.50 | 1.41 | 0.91 | 1.30 | 1.21 |
| Avg. min next 3 days | -1.91 | -1.15 | -1.97 | -1.26 | -1.40 |
Tuesdays are even better when the market opens up!
One can make many twists with this. For example, only going long on Tuesdays if SPY falls from the open.
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Conclusion:
Because of the strong mean reversion tendencies in the S&P 500, reversal trading strategies work well in the stock market, at least for the time being. You might also want to read about the Turnaround Tuesday trading strategy.
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Wow, nice post. Do you exploit this phenomena often? I take it that it doesn’t even matter what kind of market we’re in, bull or bear.
– Marvin
I’m not trading it right now. But I will in the near future. The drawback is that the ever changing market cycles make patters disappear. But this has been prevalent for quite some time. And the good thing this result can lead to a lot of twists, also for daytrades.
And you’re right – bull or bear market does not matter.
Awesome. I’ll follow along and would love to see your results.
just one question about the changing market cycles.
how do you figure out when one strategy that you are using stops working and how long do you wait until stop trading it?
do you have a planning on how to do it or do you use subjective methods in this specific topic?
Just want to congratulate you.Nice blog.
MT
Hi,
That’s tricky. Up until now I have mainly traded structural inefficiencies in how the markets work. then it’s quite easy to know when it stops working. But for the strategies I have written on this blog it’s more difficult. You never know. However, most strategies mentioned here is liquidity providers, and hence I feel quite confident they will always work (more or less, of course). But you need to monitor and trade different instruments as well.
So I guess you are telling me that its subjective.
but I cant understand how could it be easy for you know when that kind of strategies stop working.
Yes, it’s kind of subjective. It’s impossible to find an objective measurement. It’s a judgement. Currently I have stopped a daytrading strategy which has not worked for two months. I traded it for 18 months prior to that. Has it stopped working? After two losing months I’m taking a break. I’m still overlooking it, and might start trading it again if performs better. But as of now – no trading.
That is why i prefer structural inefficiencies. They are hard to find, but when they stop working it’s easy to know.
thank you Oddmund, now i understand the mental process for deciding it.
one more thing, what are the characteristics of a structural inefficiency strategy? and why its easy to know when it stops working?
the main difficulty for me is to know how many observations is needed to prove the change in the returns of the strategy.
im trying to learn how to daytrade and im liking so much your blog.
sry for my english.
An example of what I call a structural inefficiency is to buy a stock at for example ARCA for 24.01 and immediately sell it on NYSE for 24.02. Call it arbitrage.