Testing for Changes in Market Structure


Below are four simple tests that begin a search for changes in market structure. The results of these tests can them be compared to different market regimes to see if "This time is different." Or not. Four tests:
  1. Todays close is in the top half of today's range

  2. Today's close is in the bottom half of today's range

  3. Today's close is in the top 10% of today's range

  4. Today's close is in the bottom 10% of today's range
[Note: on 04/03/09 several 'swing' tests were added to provide intraday and multiday views into market structure.]

The SP Futures study below uses the above four tests to search for market structure changes between 1997-2009, 2008-2009, and 2000-2002.

Test 1/1/1997-
4/2/2009		 1/1/2008-
4/2/2009		 1/1/2000-
12/31/2002
Close in top half of range 55% 50% 51%
Close in bottom half of range 45% 50% 49%
Close in top 10% of range 15% 14% 14%
Close in bottom half of range 11% 13% 13%


The results show a daily market structure almost identical to the market structure from 2000-2002.

And now a comparison of multiday structures -

Test 1/1/1997-
4/2/2009		 1/1/2008-
4/2/2009		 1/1/2000-
12/31/2002
Swing High followed by higher Swing High 54% 44% 46%
Swing High followed by lower Swing High 46% 56% 54%
Swing Low followed by lower Swing Low 50% 59% 58%
Swing Low followed by higher Swing Low 50% 41% 42%


Again, the results show a daily market structure almost identical to the market structure from 2000-2002.

And finally a comparison of the intraday structures based on swing highs and lows on a 5 minute chart -
Test 1/1/1997-
4/2/2009		 1/1/2008-
4/2/2009		 1/1/2000-
12/31/2002
Swing High followed by higher Swing High 51% 52% 48%
Swing High followed by lower Swing High 47% 47% 50%
Swing Low followed by lower Swing Low 49% 53% 51%
Swing Low followed by higher Swing Low 48% 44% 46%


And the first real difference between 2000-2002 and 2008-2009 appears as an increase in swing highs followed by swing highs and swing lows followed by more swing lows. The market appears trendier in the 2008-2009 regime than it was in the 2000-2002 regime.

Adding more tests at higher and lower levels of granularity can help further clarify market structure changes. Identifying market structures helps in the development, testing and deployment of trading systems.

Henry Carstens
Vertical Solutions
carstens@verticalsolutions.com



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