Thursday, July 19, 2012

What Wednesday's Move to a 50-day High Was Missing

One notable is that that SPY closed at a 50-day high today (matching the 7/3/12 close).  I’ve shown in the past that a new 50-day high is often more reliable after a period of consolidation.  In this case it has been more than 10 days since we last saw a 50-day closing high.  But unfortunately there is one ingredient that today’s new high was missing – an unfilled gap up.  The study below is from the Quantifiable Edge Subscriber Letter and it examines the importance of an unfilled upside gap.  Below I show closes at 50-day highs that occurred in conjunction with an unfilled gap (unlike Wednesday).

Results here are strong across the board. Technicians will often use the term “breakaway gap”.  This suggests the gap occurs on the same day as a base breakout.  The idea is that the new high causes excitement and the gap leaves a good amount of people sidelined or stuck short.  When it doesn’t immediately fill, it leads these people to chase and helps to propel the market even higher.

Now let’s look at instances where the 50-day high breakout was not accompanied by an unfilled gap.  Interestingly, the number of instances was exactly the same.

As you can see these moves to new highs that don’t start with an unfilled gap are much less reliable.  Unfortunately for the bull case, this is what happened on Wednesday.  The gap down to start the day may not have seemed like a big deal to most, but it means the odds of immediate follow-through are greatly diminished.

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