2 Up Days After A 20-day Low The SPY Gaps Up 1%...

A quick study for you the morning...

Not much to go by, but perhaps some caution is warranted intraday. I also looked out over the next few days. They appear to be a tossup.

2% Gaps Up From 20-day Lows

With SPY looking to gap up over 2.5% this morning below is a quick look at all other instances since 2003 when SPY gapped up over 2% immediately following a 20-day low.

Low number of instances, but the suggestion is obvious.  I would note, though that although they all finished higher, they also saw some substantial pullbacks from the opening price.

When The Wednesday Prior To Thanksgiving Has Closed Lower

It appears the market is going to buck historical tendencies today and close down.  This will be the 11th time since 1960 that the SPX has closed lower on the Wednesday before Thanksgiving.  Below I have listed the other 10 instances along with the SPX performance on Friday (the day after Thanksgiving).

The 2 instances that I have circled are the only 2 where the SPX closed the Wednesday before Thanksgiving down over 1%.

For what it's worth I would note that statistics associated with these 10 instances (win %, profit factor, avg. gain, etc) are pretty much in line with all Fridays after Thanksgiving.  (It has generally been bullish.)

The Wednesday Before Thanksgiving

Thanksgiving has typically shown some pretty consistent seasonality.  Both the Wednesday before and the Friday after have exhibited bullish tendencies while the Monday after has been slightly bearish.  Last year I showed a table breaking it all down by day.  Today I decided to show a profit curve that represents simply owning the SPX from Tuesday's close through Wednesday's close.

Futures are down quite a bit this morning, so it may be difficult to keep this curve moving higher today, but over the years the next couple of days has been a pretty good bullish bet.  And when seasonality is this consistent it is often worth keeping in mind.

A 1% Gap Down from a 20-day Low

The SPY finished at a 20-day low on Friday, and now it is gapping down large this morning. I ran a test to see what kind of intraday edge this might suggest.

The raw numbers appears to suggest a mild intraday upside edge. But take a look at the profit curve.

This curve does not get me excited about buying into this gap down. Instead I will need to see more compelling evidence in order to anticipate an intraday move higher.

Vegas Traders Expo

I am at the excellent Las Vegas Traders Expo for the next few days.  I plan on seeing several presentations and will be speaking myself on Saturday.  I'd love to meet some blog readers, so please come introduce yourself if you see me. 

More information here:

http://www.moneyshow.com/tradeshow/las_vegas/traders_expo/main.asp


And here's the info on my presentation:

http://www.moneyshow.com/tradeshow/las_vegas/traders_expo/workshop_details.asp?wid=662DEA40711D4A5996872FB4F518F39D

Low Volume A Possible Concern

Monday’s extremely low volume could be a short-term bearish sign. The 0.96% drop did not quite qualify for this 2008 study, but below is another past study that does exemplify the low-volume issue. Rather than index volume, it uses SPY volume. Either one would yield similar results in this case.

While not the most overwhelming edge we’ve ever seen, it does seem to strongly suggest that caution is warranted.

Veterans Day Performance

Veterans Day is one of the few US holidays when the bond market is closed and the stock market is open. Columbus Day is another. But while Columbus Day has exhibited some quantifiable edges, Veterans Day has not. Veterans Day is celebrated on November 11th (or the closest weekday to November 11th) each year. For a brief period from 1971 – 1977 it was celebrated on the 4th Friday of October. Below is a profit curve that shows how Veterans Day has performed over the years.

While for a good long while it appeared Veterans Day may provide an upside edge, the curve topped out in 1992. Since then it has been mostly lower. Happy Veterans Day and thanks to all veterans!

Large Gaps Up After 3% Drops

With the market set to gap up 1%+ this morning I decided to look at other times a 3% drop was followed by a 1% gap up. Below I have listed all 10 instances along with their intraday performance.

Though the numbers don’t suggest a statistically significant edge, the early indications appear to suggest a tendency for further upside by the close. It is interesting that the avg run-up and avg drawdown are both about 2.8%. So traders could consider playing the intraday oscillations rather than taking a directional bet right off the bat.

Why Inside Days No Longer Get Me Down

SPY failed to make either a higher high or a lower low than the day before. This is often referred to as an “inside day” because the range was completely inside the previous day’s range. In the past I have shown how inside days under the 200ma have often been followed by moves lower. What’s interesting is that while that held true for a long time, since the bottom in 2009 it has not been the case. Let’s first look at an updated results table based on this setup.



As you can see the statistics still appear bearish, with the downside edge basically playing out over the 1^st 3 days.  But now let’s take a look at the profit curve.





As you can see over the last two years (and 15 or so instances) the setup has not provided a downside edge.  Both the 1-day and 2-day profit curves looked very similar to this. 

It is important to understand when historical instances provide a directional edge.  But the market is always evolving.  And sometimes setups that provided an edge for a long time will either stop working or will go a period of time without demonstrating the same tendency.  It is important to monitor not only how has a setup performed over the long term, but also keep an eye on recent instances to ensure that edge is still being provided.  In this case it doesn’t seem to be.

Fed Days After Large Drops

While Fed Days have historically provided an upside edge, that edge has been substantially more powerful when there has been strong selling the day before. The last time I showed this study on the blog was 4/28/10. I've updated the statistics below.

Instances are a bit low, but they couldn’t get much more bullish. With a profit factor over 11 and the average trade about as positive as the worst trade was negative, risk/reward appears to heavily favor the bulls.

With the makret gapping up large this morning it may be too late to take advantage of this one. I did send a Tweet yesterday afternoon linking to the Fed Day studies where astute readers would have found this study posted in April of 2010. If you would like to follow me on Twitter you may do so at http://twitter.com/qerob