I also found when doing this study that the stronger selloffs led to stronger further declines on average.
Friday, January 30, 2009
Unfilled Downside Gaps Coming From Overbought Conditions
The last time the market was moving off a similar overbought condition was January 7th and that day’s bar was very similar to similar to Thursday’s. It included an unfilled gap down from an overbought condition and a selloff of close to 3%. Below is a study that appeared in the January 8th Subscriber Letter that looked at similar situations. Note the study does not include the January 7th instance which led to further selling.