Wednesday, March 3, 2010

Does Tuesday's Weak Finsh Suggest A Pullback Is Coming?

When the market puts in a bar like SPY did on Tuesday I always hear people suggest that the weak finish indicates the bulls are losing control and a pullback is likely to follow. These claims sound reasonable but are generally way off base. To demonstrate I ran a test of performance following unfilled upside gaps that make a 20-day high. Below I’ve broken out the results by times the SPY closed above the open versus times it closed below the open.

First let’s look at those times where the finish was relatively strong:

There doesn’t appear to be any edge in either direction here. Now let’s examine times like the present where SPY closed below the open. Other than that – all the rules are the same.

These results are substantially better than earlier where the finish was above the open. Rather than worrying about the weak finishes like Tuesday, bulls should be excited by it.

I should note that this is one of several studies I am looking at currently and that my overall bias for the next few days is not bullish.


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