The specific day within the trading week does actually matter to traders and depending on what exactly day the market is trading, different patterns can be seen. The day of the week factor is particularly important to day traders as it helps them better identify volatility and expected highs and lows. This indicator works much like all other seasonal indicators, except that it is specific to one week at a time. This day of the week factor becomes more evident during sideways or bull markets, and much less so during periods where markets are falling fast, where almost every day can be a down day for many days in a row.
In sideways and up moving markets however the patterns are there, as the day of the week factor somehow impacts the key stock indices. The sequence of patterns starts on Monday and ends on Friday, and the entire factor works in a slightly complicated but possible to understand way. The key characteristic point of the day of the week factor is that during a sideways or bull market, the first half of the week is expected to show the greatest gains in stocks, while the second half of the week is expected to show little gains or more likely losses, or at least some deep intraday lows. The middle of the week is the day of Wednesday and this is seen as the most volatile and trendless day of the week.
In general, the market when in a sideways or bull phase, will attempt to rally on Monday, if Monday ends flat or little changed then it will attempt again on Tuesday, and if none of the first two days show a rally, then the role of Wednesday may change and the market may post a huge rally on Wednesday. There tends to be a significant rally day, at least one rally day in the first half of the week, then comes Thursday, which is typically a weak day, the market tends to decline a lot, or at least make some brief intraday deep lows on Thursdays, so it is the weak day in the trading week. Thursday however can too have a double role, it tends to act as a weak day only when the first half of the week has been strong for stocks. If the first half of the week has been weak for stocks and stocks have already declined for the week. Then Thursday acts in reverse and becomes a counter trend day, producing a sharp rally. The role of the day of Thursday is so profound in the stock markets, that traders can see big declines and counter trend rallies on many Thursdays on the charts, and the entire weekly pattern does make sense almost every time. It is important to note here that when Thursday acts as a counter trend day, where the first half of the week was weak for stocks, but Thursday comes with a big rally, any buy signals produced by the close on that day are meaningless and should not be taken seriously, since the market is only reacting by this rally, as though it was a correction. And even though the major trend may be sideways or up, there are declines and downward corrections that last for weeks, so the trend in focus, looking 10-15 days out, is actually down and that Thursday’s rally is probably meaningless.
Then is the day of Friday, which is seen as neutral by traders, Friday can be any kind of day and is not affected by the other 4 preceding days in the trading week, Friday however can determine what the Following Monday will be. A weak Friday is followed by a weak Monday, and when Friday is strong for stocks, then Monday may follow on the momentum and post a big rally as well.
The day of the week factor prepares day traders for the potential times where the market may be triggered by all kinds of news and reports to go up or down. The day of Thursday in particular allows traders to take profits on Wednesday when the early week has produced gains on long stock trades, this way they avoid the down day or deep lows of Thursday. Or in fact they might use Thursday’s lows to go long again. And when Thursday works in reverse, they are careful to get out of short trades by the close on Wednesday, as they know that the next day there will likely be a surprise rally without explanation. Just by viewing the trading week in two parts, and seeing Wednesday as the middle day where likely it will be a trendless day, traders are able to better manage risk and their trades as the trading week unfolds.