$SPY Gaps Up More Than 1.75% and Closes Higher Than the Open. Bullish or Bearish?

555 views

After the last 2 crazy days in the market, I’m going to bang out a few more studies to try and figure out what is going on. This study builds on tonight’s previous study – $SPY Gains More than 4% in 2 Days. Bullish or Bearish?

The setup is simple enough. $SPY gaps up more than 1.75% above the previous close, and then closes higher than the open. I added 2 modifications to that setup, which I’ll discuss below.

The Rules:

  • Buy $SPY at the close after the open gapped up more than 1.75% above the previous close and the close is higher than the open.
  • Sell $SPY at the close X days later.
  • No commissions or slippage included.
  • All $SPY history used.

The Results:

First we’ll discuss the results of the setup (blue line). There were 38 occurrences of this setup, with 19 held the full 50 days. Sample size should be a concern. On average, we have gapped down the next day after the setup. Over the next several days, $SPY has tended to trade beneath the gap-day close. Ignoring the small sample size, this setup has yield neutral results over the next month and would not beat the average $SPY buy and hold trade over 50 days.

Modification A: This is modification removes the requirement that the gap day closes higher than the open. I included the mod to get more samples. There were 56 occurrences of this setup, with 25 held the full 50 days. Modification A is also a neutral setup over the first month. Not requiring the gap day to close higher than the open included some trades which pushed the results up to bullish levels after 50 days.

Modification B: This modification is a nod to the previous study. It requires the setup from Modification A and that $SPY has gained more than 4% in 2 days. Because of the specificity of the setup (we are basically modeling almost exactly the last two day’s trading), the sample size is small. There were 22 occurrences of Modification B with 11 trades held the full 50 days. The results are bearish over the next month.

As often is the case, the situation is murky. On average, $SPY has retraced a large gap / large gain over the next few days. Thus, I am looking for a small retrace in the next day or so of less than 1%, and then a higher high. After the higher high is made, I expect that a gap-fill process will begin.

Traders who have not chased here may want to consider waiting a bit longer before getting in, or at the very least, entering in small positions.

Previous and Related Post: $SPY Gains More than 4% in 2 Days. Bullish or Bearish?

For more on gaps, check out Quantifiable Edges recent post: 1% Gaps Higher to Start the Month.

Bad News, Good News: A Crash, a Rally

859 views

After a large bear market breakaway gap where both the open and the close were more than -2% beneath the previous close, what can we expect in both the short and intermediate terms?

If the past is any guide to the future, things will get worse before they get better.

Today’s open gapped down -2.90% and the close finished -3.23% beneath the previous close. Truly, it was a nasty, ugly day, and the market came very close to breaking through support near $112.00. Support held, and SPY formed a doji.

Those who are very bearish after witnessing the decapitation of the bulls are right to be bearish. Those who are bullish are right to be bullish. However, the bears are likely to be right in the short term. Bulls, gird your loins. Bears, if there is a crash, take your money and run.

The Rules:

Buy SPY at the Close If:

  • The open gaps down < -2%
  • The close is < -2% beneath the previous close
  • The close is < than both the MA50 and the MA200

No commissions or slippage included. First SPY trade was 9.17.98

The Results:

Analysis of Results:

Sample size is always an issue when attempting to model a specific market event, and this study is no different. There were 19 occurrences of this setup, but only 5 samples were available if each trade were held for the full 100 days.  Therefore, these results may not be generalizable. Unfortunately, because $SPX does not record gaps, I could not use the much longer history that is available.

Look: This chart is showing the average of the trades. Actual trades were worse or better. The bottom line is that a -6% fall or +8% gain is huge and speaks to the volatility that lies ahead. Hopefully today removed all doubt, but if not, WE ARE IN A BEAR MARKET. In bear markets, one can lose lots of money. Pro tip: in a bear market, you want to sell the rips, and be very, very careful about buying the dips.

Still, the results reflect the possibility of a bottom being put in. I agree. If we can get a large flush out, I think we may have a solid bottom that can last for months.

My gut says that the near-term will look much like the chart above. I fully expect a bounce and/or consolidation, and then a gut-wrenching Armageddon-style week.

***Update***

Below is a chart showing the dates of 19 setups and the returns 1 close later.

 

Bearish: When Will Tuesday’s Gap Be Filled?

389 views

Tuesday’s gap of just more than 0.9% brought welcome relief from the recent slide. Will the relief last, or will the gap soon be filled?

Let’s model recent action and see what is suggested by the results.

Rules:

  • 1 day ago, the 9 day rate of change was less than -5%
  • Today, SPY gaps up more than 0.9% and today’s close is higher than the open
  • The close is less than the 50 day moving average.
  • No commissions or slippage included
  • All SPY history used

Summary of Results:

There were 30 occurrences of this setup.

Results suggest that the gap will be filled within 3-5 days and that the recent lows may be revisited or even broken.

However, if the market does trade down -2.5% from here, it may activate this recent study, which was bullish.

Bottom Line: Yesterday’s move does not suggest that the market has put in a bottom.

Buying SPY After a Large Gap Up

439 views

Should a large SPY gap-up be faded or bought?

On April 20th (or 3 days ago at the time of the writing of this article), SPY gapped-up over 1%. Not only was the gap-up large, but the low for the day was less than a dime beneath the opening price.

Gaps can be measured a couple of different ways, and for these tests, I’ve measured them from the previous close to the open and from the previous close to the low of the day. For example, SPY could have an opening gap (measured from the previous day’s close to the open) of greater than 1%, while the gap measured from the previous close to the day’s low would be less than the amount of the opening gap. Measuring the gap from the previous close to the low will be more restrictive and result in fewer trades.

The Rules:

Buy SPY at the close if

  • The distance from the previous close to the open is greater than 1%
  • The distance from the previous close to the low of the day is greater than 1%
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

The Results:

Summary of Results:

The blue line measures the gap from the previous close to the low, while the  red line measures from the previous close to the open. Remember that there are many more gaps that are greater than 1% from the previous close to the open (179) compared to using the low (57).

The green line is a very simple measure of buying and holding SPY over X number of days, starting with the first day of SPY history. This measure is limited, to be sure (for example, altering the first day of data by a month or so will affect returns), but it does give a baseline from which to compare the gap trades.

Compared to the baseline, after a large gap up, SPY under-performs. However, the average trade low over the next 20 days (for both measures of gaps) is greater than the gap amount of 1%. This suggests that a gap-fill may occur intra-day, but on a closing basis, we are better off NOT betting on a gap fill over the next 20 trading days. Put more simply, large gap-ups are not easily filled.

After 13 trading days, buying after a large gap-up has tended to out-perform the baseline SPY performance.

Bottom Line: Fading large gaps with the hopes of profiting from a gap fill may not be the best way to play. Instead, it may be better not to fade, and instead buy weakness after the gap-up.

Look For Big Up Day; Very Bullish Here

173 views

Today’s SPY action has lead to large gap ups the next day and is very bullish for the next 7 trading days.

I have modeled today’s SPY action and looked in the past to see what happened next.

Rules:

  • Buy SPY when it gaps down 2% or greater and the close is 1% or more higher than the open.
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

I have added three additional factors:

  1. Gap down 2.5% or greater and the close is 1.5% or more higher than the open (this is almost exactly models today’s action).
  2. #1 AND volume equals a 50 day high.
  3. Gap down 2% or greater and the close is 1% or more higher than the open AND volume equals a 50 day high.

Results:

A word about sample sizes…Of course, the greater the number of samples, the more we can generalize the results. Since this setup is fairly specific, it suffers from small sample sizes. Therefore, results may not be generalizable.

  • 2% GapDn, C 1% > O = 24 samples
  • 2.5% GapDn, C 1.5% > O = 9 samples
  • 2% GapDn, C 1% > O AND V=50dayHigh = 7 samples
  • 2.5% GapDn, C 1.5% > O AND V=50dayHigh =4 samples

Results are very bullish for the next day, with the lowest return averaging 0.75% and the best return averaging 4.09% Due to these results, I believe there is a good chance that tomorrow will see strong gains.

As we look out over the short-term, results are still very bullish for up to 7 trading days with the worst average return gaining more than 2%.

The intermediate term results are very volatile. This is likely due to small sample sizes. If we look at the blue line, which has the largest number of samples, we see the possibility of  lower lows or consolidation.

The bottom line is that we should be looking for a bounce with some follow-through. Volatility is likely to remain elevated. The intermediate term is blurry but may become more clear over the next several days.

For more reading on this topic, be sure to visit the Quantifiable Edges blog: 2% Gaps Downs and Other Disasters.

Gap Study: Market Gaps Down 1% or More.

226 views

I have the futures down greater than 1% and it looks as if the weakness may actually hold through the night. It is possible that the market may gap down more than 1% on tomorrow’s open.

What happens after the market gaps down 1% or more?

Rules:

Buy the open on SPY if it gaps down 1% or more. Sell the close X days later. No commissions or slippage.

Additional factors:

  • 1% Gap Down from 10 Day High
  • 1% Gap Down and SPY last closed at a 10 day high.
  • 1% Gap Down when the $SPX last closed above the 50 day simple moving average.

Results:

Caveats:

Buying a gap down greater than 1% had a nearly flat edge until the Bear Market of 2007-2009. During the Bear Market, buying a gap down simply did not work. This period of terrible performance skewed the results negatively.

Since 2010, buying a gap down of 1% or more has worked very well.

Based on these results, it is difficult to guess if the pattern that has dominated since 2010 will prevail. If the market does recover from any large gap down, it will likely be at least a week and likely two weeks before the market makes a new high.

$SPY Gaps Up More Than 1.75% and Closes Higher Than the Open. Bullish or Bearish?

555 views

After the last 2 crazy days in the market, I’m going to bang out a few more studies to try and figure out what is going on. This study builds on tonight’s previous study – $SPY Gains More than 4% in 2 Days. Bullish or Bearish?

The setup is simple enough. $SPY gaps up more than 1.75% above the previous close, and then closes higher than the open. I added 2 modifications to that setup, which I’ll discuss below.

The Rules:

  • Buy $SPY at the close after the open gapped up more than 1.75% above the previous close and the close is higher than the open.
  • Sell $SPY at the close X days later.
  • No commissions or slippage included.
  • All $SPY history used.

The Results:

First we’ll discuss the results of the setup (blue line). There were 38 occurrences of this setup, with 19 held the full 50 days. Sample size should be a concern. On average, we have gapped down the next day after the setup. Over the next several days, $SPY has tended to trade beneath the gap-day close. Ignoring the small sample size, this setup has yield neutral results over the next month and would not beat the average $SPY buy and hold trade over 50 days.

Modification A: This is modification removes the requirement that the gap day closes higher than the open. I included the mod to get more samples. There were 56 occurrences of this setup, with 25 held the full 50 days. Modification A is also a neutral setup over the first month. Not requiring the gap day to close higher than the open included some trades which pushed the results up to bullish levels after 50 days.

Modification B: This modification is a nod to the previous study. It requires the setup from Modification A and that $SPY has gained more than 4% in 2 days. Because of the specificity of the setup (we are basically modeling almost exactly the last two day’s trading), the sample size is small. There were 22 occurrences of Modification B with 11 trades held the full 50 days. The results are bearish over the next month.

As often is the case, the situation is murky. On average, $SPY has retraced a large gap / large gain over the next few days. Thus, I am looking for a small retrace in the next day or so of less than 1%, and then a higher high. After the higher high is made, I expect that a gap-fill process will begin.

Traders who have not chased here may want to consider waiting a bit longer before getting in, or at the very least, entering in small positions.

Previous and Related Post: $SPY Gains More than 4% in 2 Days. Bullish or Bearish?

For more on gaps, check out Quantifiable Edges recent post: 1% Gaps Higher to Start the Month.

Bad News, Good News: A Crash, a Rally

859 views

After a large bear market breakaway gap where both the open and the close were more than -2% beneath the previous close, what can we expect in both the short and intermediate terms?

If the past is any guide to the future, things will get worse before they get better.

Today’s open gapped down -2.90% and the close finished -3.23% beneath the previous close. Truly, it was a nasty, ugly day, and the market came very close to breaking through support near $112.00. Support held, and SPY formed a doji.

Those who are very bearish after witnessing the decapitation of the bulls are right to be bearish. Those who are bullish are right to be bullish. However, the bears are likely to be right in the short term. Bulls, gird your loins. Bears, if there is a crash, take your money and run.

The Rules:

Buy SPY at the Close If:

  • The open gaps down < -2%
  • The close is < -2% beneath the previous close
  • The close is < than both the MA50 and the MA200

No commissions or slippage included. First SPY trade was 9.17.98

The Results:

Analysis of Results:

Sample size is always an issue when attempting to model a specific market event, and this study is no different. There were 19 occurrences of this setup, but only 5 samples were available if each trade were held for the full 100 days.  Therefore, these results may not be generalizable. Unfortunately, because $SPX does not record gaps, I could not use the much longer history that is available.

Look: This chart is showing the average of the trades. Actual trades were worse or better. The bottom line is that a -6% fall or +8% gain is huge and speaks to the volatility that lies ahead. Hopefully today removed all doubt, but if not, WE ARE IN A BEAR MARKET. In bear markets, one can lose lots of money. Pro tip: in a bear market, you want to sell the rips, and be very, very careful about buying the dips.

Still, the results reflect the possibility of a bottom being put in. I agree. If we can get a large flush out, I think we may have a solid bottom that can last for months.

My gut says that the near-term will look much like the chart above. I fully expect a bounce and/or consolidation, and then a gut-wrenching Armageddon-style week.

***Update***

Below is a chart showing the dates of 19 setups and the returns 1 close later.

 

Bearish: When Will Tuesday’s Gap Be Filled?

389 views

Tuesday’s gap of just more than 0.9% brought welcome relief from the recent slide. Will the relief last, or will the gap soon be filled?

Let’s model recent action and see what is suggested by the results.

Rules:

  • 1 day ago, the 9 day rate of change was less than -5%
  • Today, SPY gaps up more than 0.9% and today’s close is higher than the open
  • The close is less than the 50 day moving average.
  • No commissions or slippage included
  • All SPY history used

Summary of Results:

There were 30 occurrences of this setup.

Results suggest that the gap will be filled within 3-5 days and that the recent lows may be revisited or even broken.

However, if the market does trade down -2.5% from here, it may activate this recent study, which was bullish.

Bottom Line: Yesterday’s move does not suggest that the market has put in a bottom.

Buying SPY After a Large Gap Up

439 views

Should a large SPY gap-up be faded or bought?

On April 20th (or 3 days ago at the time of the writing of this article), SPY gapped-up over 1%. Not only was the gap-up large, but the low for the day was less than a dime beneath the opening price.

Gaps can be measured a couple of different ways, and for these tests, I’ve measured them from the previous close to the open and from the previous close to the low of the day. For example, SPY could have an opening gap (measured from the previous day’s close to the open) of greater than 1%, while the gap measured from the previous close to the day’s low would be less than the amount of the opening gap. Measuring the gap from the previous close to the low will be more restrictive and result in fewer trades.

The Rules:

Buy SPY at the close if

  • The distance from the previous close to the open is greater than 1%
  • The distance from the previous close to the low of the day is greater than 1%
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

The Results:

Summary of Results:

The blue line measures the gap from the previous close to the low, while the  red line measures from the previous close to the open. Remember that there are many more gaps that are greater than 1% from the previous close to the open (179) compared to using the low (57).

The green line is a very simple measure of buying and holding SPY over X number of days, starting with the first day of SPY history. This measure is limited, to be sure (for example, altering the first day of data by a month or so will affect returns), but it does give a baseline from which to compare the gap trades.

Compared to the baseline, after a large gap up, SPY under-performs. However, the average trade low over the next 20 days (for both measures of gaps) is greater than the gap amount of 1%. This suggests that a gap-fill may occur intra-day, but on a closing basis, we are better off NOT betting on a gap fill over the next 20 trading days. Put more simply, large gap-ups are not easily filled.

After 13 trading days, buying after a large gap-up has tended to out-perform the baseline SPY performance.

Bottom Line: Fading large gaps with the hopes of profiting from a gap fill may not be the best way to play. Instead, it may be better not to fade, and instead buy weakness after the gap-up.

Look For Big Up Day; Very Bullish Here

173 views

Today’s SPY action has lead to large gap ups the next day and is very bullish for the next 7 trading days.

I have modeled today’s SPY action and looked in the past to see what happened next.

Rules:

  • Buy SPY when it gaps down 2% or greater and the close is 1% or more higher than the open.
  • Sell X days later
  • No commissions or slippage included
  • All SPY history used

I have added three additional factors:

  1. Gap down 2.5% or greater and the close is 1.5% or more higher than the open (this is almost exactly models today’s action).
  2. #1 AND volume equals a 50 day high.
  3. Gap down 2% or greater and the close is 1% or more higher than the open AND volume equals a 50 day high.

Results:

A word about sample sizes…Of course, the greater the number of samples, the more we can generalize the results. Since this setup is fairly specific, it suffers from small sample sizes. Therefore, results may not be generalizable.

  • 2% GapDn, C 1% > O = 24 samples
  • 2.5% GapDn, C 1.5% > O = 9 samples
  • 2% GapDn, C 1% > O AND V=50dayHigh = 7 samples
  • 2.5% GapDn, C 1.5% > O AND V=50dayHigh =4 samples

Results are very bullish for the next day, with the lowest return averaging 0.75% and the best return averaging 4.09% Due to these results, I believe there is a good chance that tomorrow will see strong gains.

As we look out over the short-term, results are still very bullish for up to 7 trading days with the worst average return gaining more than 2%.

The intermediate term results are very volatile. This is likely due to small sample sizes. If we look at the blue line, which has the largest number of samples, we see the possibility of  lower lows or consolidation.

The bottom line is that we should be looking for a bounce with some follow-through. Volatility is likely to remain elevated. The intermediate term is blurry but may become more clear over the next several days.

For more reading on this topic, be sure to visit the Quantifiable Edges blog: 2% Gaps Downs and Other Disasters.

Gap Study: Market Gaps Down 1% or More.

226 views

I have the futures down greater than 1% and it looks as if the weakness may actually hold through the night. It is possible that the market may gap down more than 1% on tomorrow’s open.

What happens after the market gaps down 1% or more?

Rules:

Buy the open on SPY if it gaps down 1% or more. Sell the close X days later. No commissions or slippage.

Additional factors:

  • 1% Gap Down from 10 Day High
  • 1% Gap Down and SPY last closed at a 10 day high.
  • 1% Gap Down when the $SPX last closed above the 50 day simple moving average.

Results:

Caveats:

Buying a gap down greater than 1% had a nearly flat edge until the Bear Market of 2007-2009. During the Bear Market, buying a gap down simply did not work. This period of terrible performance skewed the results negatively.

Since 2010, buying a gap down of 1% or more has worked very well.

Based on these results, it is difficult to guess if the pattern that has dominated since 2010 will prevail. If the market does recover from any large gap down, it will likely be at least a week and likely two weeks before the market makes a new high.