Big Gaps Down on Mondays

I took a look this morning to see how the market has typically reacted when faced with a big gap down on a Monday morning.  Results below examine all gaps of 0.75% or more and measure the performance from the 9:30 open to the 4pm close.

Numbers here look a bit poor.  I also ran a profit curve.

The curve shows that the downside edge appears to have lessened over time.  I also decided to break it down by the long-term trend.  These next 2 charts show results when below and then above the 200ma.

It appears the real damage has been done during long-term downtrends.  During uptrends, big gaps down on Monday's have been neither reliably bullish nor reliably bearish.  Additional evidence would be needed for me to initiate a new position.

We-versal Wednesday?

Going into the day yesterday we had a Turnaround Tuesday setup.  When the market is down 3 days in a row going into a Tuesday, it has had a strong tendency to bounce.  Of course there have been instances over the years where it hasn’t.  And yesterday was one.  When it doesn’t rise on Tuesday what does that mean for Wednesday and beyond?  Though it has appeared in the Subscriber Letter numerous times over the years, I have not shown the test below on the blog since August of 2012.  It answers that "Wednesday & beyond" question.

Results here have been very strong over a long period.  It seems the Turnaround Tuesday failure has typically been a temporary setback.

The Weakest Week Is Here Again

From a seasonality standpoint, there isn’t a more reliable time of the year to have a pullback than this upcoming week.  Since 1961 (and over most every time period) the week following the 3rd Friday in September has produced the most bearish results of any week.  In the 9/24/12 blog I showed a chart of SPX performance during this week since 1961.  I have updated that chart below.

As you can see the bearish tendency has been pretty consistent over the last 52 years.  There was a stretch in the late 80’s where there was a series of mild up years.  Since 1990 it has been pretty much all downhill, and last year was no exception.

An Updated Look At Fed Rallies To New Long-Term Highs

In “The Quantifiable Edges Guide to Fed Days” I discussed Fed Days that close at new highs.  The basic finding was that when the market closed at a short-term high on a Fed Day, then it was likely to pull back over the next few days.  But when it closed at a long-term high, then the rally was likely to continue.  Below is a study from the Guide that last appeared in the 9/14/12 blog.

This suggests further upside is likely over the next 1-2 weeks.

An Unfilled Up Gap / Inside Day Pattern

Today’s movement will largely be due to the market’s reaction to the Fed.  But I thought I would share a study that triggered yesterday that would perhaps have a bit more influence on a non-news day.  It looks at days like Tuesday where the market gaps higher, never fills, and moves higher from open to close without making a higher high.

Implications here appear somewhat bearish, with most of the damage occurring on day 1.  Traders may want to keep this pattern in mind for the future.

When VIX Rises On Monday As SPX Hits A Short-Term High

I am seeing a mix of short-term evidence at the moment.  Having not shown anything bearish lately, I decided to share the study below, which triggered at the close on Monday and hints of a downside edge.  It looks at times during long-term uptrends that the VIX closes up on the first day of the week while the SPX is closing at a 10-day high.  Most of the time the VIX and SPX will trade in opposite directions. The VIX has a natural tendency to fall on Fridays and rise on Mondays.  Due to this, Monday is the most common day of the week to see VIX rise in conjunction with SPX.  This study appeared in the Quantifinder yesterday afternoon, and I have updated all stats below.

Results here certainly appear to suggest a day or two of weakness.

Of course Wednesday is a Fed Day, which brings about additional considerations.  Ahead of this, traders may want to review many of the Quantifiable Edges Fed Day edges using the Fed Study label.  Or for a more complete collection of Fed Day studies, check out The Quantifiable Edges Guide to Fed Days.

A Pullback After At Least 5 Up Days

Thursday’s moderately lower close triggered the following study that examines pullbacks after multi-day runs higher.

Initially there appears to be a moderate inclination for a move higher. Once you get out 9-10 days the upside edge appears solid. The idea behind this study is that strong moves higher tend to weaken before they roll over. The five days up suggest the move is strong. Since they rarely turn on a dime, this 1st dip is not likely the end of the up move.

Another Study Suggesting Short-Term Strength Begets Intermediate-Term Strength

When the market starts to get short-term overbought we often see studies pop up that suggest a downside edge.  But when the overbought condition gets very strongly overbought, then those downside edges often disappear.  And rather than strength leading to weakness the strength will beget more strength.  The strong move higher over the last several days has turned the market so overbought that downside edges are no longer prevalent.  We saw this in a study yesterday morning and another one popped up Tuesday afternoon.  The study below exemplifies the kind of extreme short-term overbought scenario the market is now in.

The numbers here are basically neutral for the first week or so.  On a short-term basis there is no edge apparent.  But once you get out 2-3 weeks, it appears the strength has re-asserted itself and the market is often higher.

What the String of 5 Higher Closes Under These Circumstances is Suggesting

Today’s study utilizes a phenomenon that I have spoken of a number of times in the past. That is that when the market begins to get overbought it will often suggest a pullback is likely, but when overbought gets powered through then odds will sometimes shift from a pullback to a continuation of that move. This study demonstrates the continuation concept.  It also examines a setup that suggests the market is 1) in a long-term uptrend, and 2) overbought short-term, but 3) not stretched intermediate-term.

These results appear to suggest a pretty consistent upside edge over the next 1-3 weeks.  The short-term (1-4 days) is a little dicey and I am seeing other evidence saying a short-term pullback could occur.  But the action of the last week seems to have generated some nice momentum for the following weeks.

A Big SPY Up Day Follow By A Low-Volume Tight Range Has Often Led To Trouble

Big intraday rallies like we saw on Wednesday that have been followed by tight, low volume consolidations like Thursday have often seen the market roll over.  The study below looks at this setup.  I last discussed it in in the 8/11/09 Subscriber Letter.  The parameters have only been met 10 previous times by SPY.  I have listed them all along with their 5-day returns below.

Instances are low but the inclination so far is strongly bearish.  The last 7 occurences closed lower 5 days later, and all by at least 1.3%.  Additionally, the Avg Drawdown is nearly 3x the Average Run-up.  Even with the low number of instances, I think this study is worth some consideration.

7 Real Deal Traders With Quality Services

Labor Day according to Wikipedia is a holiday “dedicated to the social and economic achievements of workers”.  So I was thinking this past weekend about some of the hardest working traders I know.  People that not only trade for a living, but as I do, offer products designed to help traders find their way.  I made a list of “Real Deal” guys.  To qualify for the list you need to meet some very specific, rigid, and somewhat unfair criteria.

1) You must actually be a trader (and make money doing it).
2) You must have a product that I am familiar with and I truly think is valuable to others.
3) I am able to verify 1 & 2 through personally knowing the person.  This means we have either met in person, or at a bare minimum, have had several long phone conversations over an extended period of time.  If I don’t know you, you aren’t on this list (that’s the unfair part).
4) You are not part of a large organization.  I started writing this with Labor Day in mind.  I know how hard it is to run a small operation and have to wear so many hats.  Everyone on the list is similar in that they are either solo or have at most a handful of people working with them.

So these are all people I feel I know to some degree and who I believe have something valuable to offer.  I also think they are upstanding folks who I am comfortable recommending.  Of course I think Quantifiable Edges & Overnight Edges are the greatest services out there, but they don’t match everyone’s style, and they don't cover everything.  So here are some other Real Deals to check out (in alphabetical order).

Scott Andrews (www.masterthegap.com) – “The Gap Guy”.  Scott’s quantitative testing is similar to mine, but is focused on gap fading, and some intraday breakout analysis.  I think he provides solid information for daytraders, I like his style, and he has become a friend over the years.

Charles Kirk(http://www.kirkreport.com/)  – At $100/year a Kirk Report subscription should be a no-brainer for nearly every trader.  His screens, analysis, links, and experience make this a resource well worth checking out.  The Kirk Report turned 10-years old this week, showing that this “real deal” (and all-around good guy) has had some staying power.

Dave Landry (http://www.davelandry.com/)– Dave’s been around a long time.  I’ve always liked his work and his ability to keep things simple.  Dave’s sense of humor always seems to shine through as well.  He’s tough not to like.

Bill Luby (http://vixandmore.blogspot.com/) – VIX & More is a terrific blog.  And traders with an eye on volatility should check out Bill’s subscription products as well.  He is an incredible resource and a real authority on volatility and ways to take advantage of it.  When it comes to the VIX, Bill is THE real deal.

Tom McClellan (http://www.mcoscillator.com/) – Tom is one of the most interesting analysts I know.  His liquidity wave approach and price pattern analogs never cease to grab my attention.  I’ve also incorporated some of his work & ideas into Quantifiable Edges (such as the TICK TomOscillator).  His knowledge also goes far beyond stocks.  I’ve met Tom a number of times, and have learned something new about science or history every time.

Jeff Pietsch (http://etfprophet.com/etf-rewind-pro/)– Jeff does not blog as much anymore, but his ETF Rewind product is a great tool for ETF traders.  It puts the ETF universe in a neat, sortable, format and makes it easier for traders to find opportunities based on a number of technical criteria.

Corey Rosenbloom (http://www.afraidtotrade.com/) – The last hard worker on this alphabetical list is also the youngest of the group.  But he does not lack for wisdom (or enthusiasm for his own work).  Corey takes a solid approach to daytrading and is certainly worth checking out.

That’s it.  Seven Real Deal people whose work I admire.  Check ‘em out when you get a chance.

Oh yeah.  Might as well plug myself as well.  Check out a subscription to Quantifiable Edges (free) or Overnight Edges ($5) sometime if you haven’t before.