Analysis of the relationship between the closing level of the market and the hi-lo range during the day
The chart below shows the frequency with which the index closes near to the high (or low) of the day. The data analysed is FTSE 100 Index daily data since 1985. The analysis first takes the day’s hi-lo range, and then calculates three threshold levels (1%, 5%, and 10%).
For example, if a day’s low is 50 and high is 70, then the Hi-Lo range would be 20. And the 1%, 5%, and 10% thresholds would 0.2, 1 and 2. The day would be said to close within 10% low of the day if the closing price was below 52. The day would be said to close within 5% of the high if the closing value was above 69.
For example, since 1985 the FTSE 100 Index has closed within 10% of its daily high on 20.8% of all days, and it has closed within 1% of its low 5.6% of all days.
An obvious observation to make is that the Index closes more often near its high of the day than the low. In nearly 1 in 10 days the index closes within 1% of the high of the day.
The effect on returns the following day
Continuing this analysis of where the index closes relative to the Hi-Lo range of the day, the following chart shows the performance of the FTSE 100 Index on the following day, split by where the index closed the previous day relative to that day’s Hi-Lo range.
For example, on the days when the index closes within 10% of its low for the day on average the index return is -0.005% the following day; and when the index closes within 1% of its high for the day on average the index return is 0.16% the following day.
As can be seen, the nearer the index closes to its high of the day, the higher the following day’s return. The other striking observation is that, whereas a close near the day’s high is associated with relatively strong returns the following day, a close near the day’s low has little effect on the average return the following day.
The above is an extract from the newly published UK Stock Market Almanac 2018.