Friday, July 1, 2011

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.


Shubby said...

Good stuff! Just picked up some BGZ at 34.50 on the open. Thanks for publishing this study.

Anonymous said...
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Anonymous said...

With instances this low, Rob, I dont suppose you bothered to look at your often-used filter of above/below some key MA like the 200 day? That might influence whether it is organic buying or merely intense short covering.

(first posting missed term above/below, probably the way I bracketed it...)


Tom Heine said...

Why would you do that Shubby, BGZ is still in a downtrend

Shubby said...

It was to try to capitalize on the edge Rob posted. I got stopped out for a moderate loss. It was a risky trade, but I like risk.

Rob Hanna said...

I did not incorporate a long-term filter. In the Thursday night subscriber letter I did provide some more details on these trades, including a list of all the instances.

SP -
Trend following is just one way to trade. There was nothing wrong with Shubby's approach. My Catapult system has performed exceptionally well for me for 6 years. It often buys stocks in steep downtrends. Value investors are another example of traders that often buy against the trend.

There are times when the trend is likely to persist and there are times where it is likely to reverse. While this particular study did not work out, historical research will often help in determinig whether short-term follow through or short-term mean reversion is likely to win out. Knowing the odds, keeping them in your favor, and managing risk well should provide favorable trading opportunities and plenty of net profits over time.