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.
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