Monday, January 25, 2010

Gaps Up From 10-day Lows

SPY is set to gap up just over 1% as I type this morning. I’ve shown before that large gaps up from low areas will often spark short covering rallies. Let’s look at some stats. First, here is a look at 1% + gaps up from 10-day lows (all stats look at the last 17 years):

Decidedly bullish edge here. The average loss size suggests risks are high, though.

Buy what if the market pulls back and the gap up is only between 0.5% and 1%?

Now you’re looking at basically a coinflip.

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