Tuesday, October 15, 2013

SPY Results After Days Like Monday With Strong Gap Reversals To 10-Day Highs

Many traders view reversals like Monday as a positive.  The fact that the market overcame a gap down and was able to close in the black and near its highs is interpreted as a sign of strength.  I’ve looked at days similar to this in the past and found that most often they are actually followed by short-term market weakness.  Below is a study that looks at situations like Monday’s.  It assumes a 1-day hold.

Eleven of 15 instances have closed down the next day.  Of course that is a bit of a small sample size, and another concern is the fact that it has been over 4 years since the last instance.  Still, I think the study is worth some consideration.

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