Gaps Down After 4 Lower Lows

The market is already short-term oversold and now SPY is gapping down large this morning. I looked at other times there were 4 lower lows followed by a gap down below the previous day’s low. Below are results looking back to 2006.

Not a ton of instances but the stats lean quite heavily to the long side. Between 2003 and 2006 the upside tendency was not apparent. I was unable to look back past 2003 this morning. Below are all instances from 2006 – present.

If you find morning gap analysis like this useful, you may want to check the work of my friend, Scott Andrews over at MasterTheGap.com.  I look at studies like this occassionally, but it is his primary focus.

Very Low Volume At A New Short-Term High

I have been away for a while.  When I’m away subscriber services continue pretty much as normal but blog posts tend to suffer.  I’m back and will have a couple of posts this week and then get back to the 3 or so per week starting next week.

Very light volume at new highs as we saw on Friday often indicates a rally is running out of buyers.  Frequently such light volume is followed by a pullback in the next few days.  There were several studies that appeared in the Quantifinder Friday that demonstrated this point.  I’ve chosen one that was also in the Subscriber Letter to highlight below.  Blog readers last saw this study on April 5, 2011.

This study looks back to the inception of the SPY in 1993.  The numbers above look fairly compelling.  I also found the edge to be quite steady over the tested period.  Of course with the gap down in the futures, much of the downside edge may be realized quicker than usual today.  It’s possible it won’t persist for as long.  Nonetheless, as I’ve shown many times before, volume does matter and traders should pay attention to it.

Edges After Poor Employment Days

The gap down on Friday occurred in reaction to the release of the employment report. The employment report is typically released on the first Friday of the month, though in some cases such as this month it occurs on a different day. This weekend I spent a good amount of time going through the BLS website and programming in all the employment days from 1993-present.

I looked at Friday's action a few different ways with regards to employment days. I found it was only the 10th time that the SPY has gapped down over 1% and failed to fill that opening gap. While I didn’t find the results significant, below I have listed the other 9 instances along with their 1-day returns.

These results seem to imply a mild inclination towards further selling the next day. Another way that I looked at employment day gaps was by using a 200ma filter and eliminating the 1% size requirement. Overall the results of doing this didn’t suggest much. I did find it interesting though that there have been three instances since the March 2009 bottom and all three instances were followed by further declines ranging from 2.4% to 4.3% during the course of the following week. Those three instances occurred on 7/2/09, 8/6/10, and 6/3/11.

I don't believe either of these employment day studies is worth heavy consideration. My main take away is that the reaction to the employment report is not necessarily an overreaction. As the employment day results showed there does not appear to be an inclination for an immediate reversal. In fact, downside follow-through may be more likely.

Employment day seasonalities aren’t typically as pronounced as Fed Day seasonalities, but they can be worth examining on occasion. Therefore I went ahead and incorporated the employment day code into the QE Tradestation Indicators & Functions Package. This way package purchasers or Quantifiable Edges subscribers may explore employment days further on their own. (Those who previously purchased the package may download this updated version at no additional charge.)

When the VXO is Extremely Low for 3 Days in a Row

I continue to see a good mix of studies.  The one below is bearish but I could also point to some bullish evidence that is perhaps just as compelling.  Anyway, when the VXO has remained extremelely stretched for multiple days, it typically signals the SPX is about to pull back.  You can see this in the study below, which triggered on Friday at the close, and could be found in the intraday Quantifinder prior to that.

I find the note at the bottom of the table to be especially interesting. It implies that the current setup provides a high probability of a quick pullback, but if that pullback doesn't appear quickly that there is a good chance that the market will continue to power higher.

QE Big Time Swing System 1st Half Results Update

I’ve updated the Quantifiable Edges Big Time Swing System overview page with results through June 30th. There is not a trade currently open. I don’t update results that often since the system only trades about once per month on average. The 1st half of 2011 produced a tame but still positive return of 3.00% for SPY (including dividends, commissions of $0.01/share, and an assumed interest rate on cash of 0.18%).  This was achieved with 1 short trade and 5 long trades.

While the SPY return was mild, it’s encouraging to see that most other ETFs did quite well. In the system manual I discuss how I tested the system for robustness using a list of 29 ETFs other than SPY. Statistics for each ETFs full history can be seen on the Quantifiable Edges Big Time Swing overview page. 2011 statistics can be seen in the table below:

For those looking for a system that they can use as a base to build their own system from, the Big Time Swing is an attractive option. It is all open-coded and comes complete with a substantial amount of background historical research. And since it is only in the market about ¼ of the time, it can easily be combined with other systems to provide greater efficiency of capital. Once you’re ready to try and improve the system yourself you can also refer to the system manual or the August 2010 purchaser-only webinar – both of which discuss numerous ideas for customization.


And if system development isn’t your thing, the Big Time Swing System provides easy to follow mechanical rules that you can follow. The standard parameters have performed quite well. There are only about 12 trades per year averaging 7 trading days per trade. All entries and exits are either at the open or the close. And to be sure you have everything set up properly traders may follow the private-purchasers only blog that shows all SPY signals and possible entry/exit levels. This service is free for 12 months from the date of purchase.


For more information and to see the updated overview sheet, click here.


If you’d like additional information about the system, or have questions, you may email BigTimeSwing @ Quantifiable Edges.com (no spaces).

3 Unfilled Up Gaps for SPY

Short-term direction is unclear at the moment. There is a mix of studies suggesting both bullish and bearish inclinations. Here is an interesting one from last night’s letter with bearish inclinations.

The fact that the gaps up each day went unfilled could suggest that a good portion of the buying may have been done by shorts who were forced to cover as prices began to get away from them. The number of instances has been quite low. On average we’ve only seen this setup occur about once every 2 years. In every case there has been a move lower in the next day or two. Statistics strongly favor the downside.

Note: for this study (and most others related to SPY gaps) I consider the gap to be from the previous day's close - not the previous day's high.