Thursday, October 23, 2008

Reversal Tendencies For 2% Gaps Lower

Last week I showed how gaps up of 2% or more tend to reverse over the next few days. Today I’ll show gaps down of 2% or more. In the table below I show all instances where the SPY opened 2% or more below the previous day’s close. The column on the right shows how long it took for the SPY to close at a price above the opening gap price. Including Wednesday’s failure, the SPY has closed above the 2% gap down open about 69% of the time. There has only been one instance where it didn’t close above the gap open at some point in the next 3 days.

Also, here’s an interesting tidbit from last night’s Subscriber LetterHow incredible has the market action been of late? Since 1960 the S&P has had 14 days where the market sold off 5% or more. The 1987 crash accounted for 3 of them. The 2000-2002 bear market only had 1 – on 4/14/2000. In the last month the S&P 500 has seen 5 days with losses of 5% or more.


Dan said...

Very interesting. Thanks for the posts. Required daily reading

Johan Lindén said...

I cannot believe have simple and reliable these 2% gap studies have been!

So simple and almost right all the time but with one exception. And that is true even in todays environment that seems to differ from other times after WW2.

This is true for both the 2% up study and down study.

Johan Lindén said...

But beware!

If we don't go upp 8% from where we are right now until monday, the last signal will be a failure. That would make me think that this indicator isn't working in this environment!

The only failure so far have also been during this bear market.

Boxtheory said...

This is from Todd Harrison,

Of the 36 times the S&P has rallied 6% in a single session over the last eighty years, 32 occurred between 1929 and 1933. History doesn't always repeat but we would be wise to remember the prevailing trend during those daunting years.

Johan Lindén said...

Amazing! This signal worked again. But it didn't take 3 days but 4 days this time. I am willing to give it an A grade anyway!

What we are waiting for now is that the "gap up sell signal" we got yesterday should be executed.

So we should shortly close under yesterdays open.