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.

A Look At Recent 1% Gap Down Days

SPY is looking like it could open down over 1% this morning.  While a 1% gap may have been considered small in the fall of 2008, this would be only the 3rd time this year that SPY gapped down as much as 1%.  Below I have listed all 1% gap downs since the beginning of 2012, and how they fared from open to close.

More often than not they have gained back some losses during the day, but it certainly has not been a lock.  Good luck trading today.

Large Gaps Down When The Market Was Near A Long-Term High

It looks like we should see some strong action on Monday.  News out of Cyprus has S&P futures down about 1.5% as I type this late at night.  I decided to look back at other times that SPY was trading near a 200-day high and then gapped down over 1% overnight.

There have not been a whole lot of instances, but early indications suggest there could be more selling after the open.  Below is a list of all the instances.

November 2009 was the only instance that put in much of a gain.  And even that one failed to fill it gap at any point during the day.  None of the others even bounced back as much as 0.6% on an intraday basis.  If the market does open as weak as it appears it may at this point, then chances of a strong upside reversal don't appear very good.

1% Gaps Higher to Start the Month

Fiscal cliff news has the market set to gap up strongly this morning.  The 1st day of the month is often a strong one for stocks, but how has it done intraday when it gapped up big to begin with?  That is what I looked at this morning.

6 of the 9 instances since 2003 have closed above the open.  Gross gains have been about 2.2 times the size of gross losses, and the average trade rose a little over 0.4% from open to close.  But with instances low I wouldn’t put a lot of faith in these numbers.  Early indications favor more upside but it is certainly not a clear-cut edge.

Big Gaps Down the Day Before a Fed Day

The pre-market indications are for a gap down of about 1% as I write this around 8:20am EST.  With tomorrow being a Fed Day I decided to see how the market has performed other times it has seen large gaps down on the day prior to a Fed Day.  This first study looks at performance from open to close on the day of the gap down.

Note that the only instance that did NOT gap down at least 1% was the last one on 12/12/11.  Instances are low.  Initial returns are mixed with a mild bearish tilt.

Now let’s see what happens if we hold through the Fed Day.

Here we see a big turnaround.  All the 1% gaps down turned net positive from their opens.  And the only instance not to see a gain of greater than 1% on the Fed Day was the last one (which gapped down less than the others to start). It added to its day 1 losses.

Gaps Up to Short-Term (but not Intermediate-term) Highs on Employment Days

A positive reaction to the employment report has the market ready to gap up this morning.  Below is one way that I examined some odds for the day...

I wouldn't get too excited about this with the low sample size, but early indications appear to suggest a mild hint of a downside edge between now and the close.

Why, After A New Low, I Prefer An Emotional Open

On Monday the SPY closed at a 50-day low for the 1st time since the beginning of October – just over 150 trading days ago.  Not only is it at an intermediate-term low, it is strongly oversold on a short-term basis based on several measures.  Many traders are therefore looking for a bounce.

Strong bounces from intermediate-term lows are often initiated by a large move overnight.  Big gaps in overnight action will often create strong emotion at the open and can help to spark a bottom (at least a temporary bottom).  To illustrate my point the study below looks at 3 scenarios.  Each scenario shows results of buying at the open the day after a 50-day closing low and selling at the close.  The only filter I use to distinguish is the size of the opening gap.

Let’s first look at small (or non-existent) gaps.

Results here appear weakly bearish.  This isn’t very surprising considering the market is obviously downtrending if it is making 50-day lows.

But now let’s see what happens when SPY gaps down over 1%.

Much more volatility among both winners and losers.  More often than not the emotion has at least temporarily washed out the selling and the net results have been solid intraday gains.

Now let’s look at results if the market gaps up over 1%.

Here again we seen bulls have won out a little more often than bears.  Like the last scenario the big gap serves to increase volatility in both winners and losers, and the net results show strong intraday gains for the bulls.  In this case the upside edge is not due to a “washout” of selling, but more likely it is panic buying as those that were short overnight are afraid that the market is going to run away from them - so they rush to cover, creating what is often referred to as a short-covering rally.

In either case, when trading at new lows, the emotion generated by a large opening gap can often ignite a flurry of price movement that is not seen following small overnight moves.   More often, but not to an overwhelming degree, that flurry of price movement will result in strong intraday gains.  This is why I become more interested in buying emotional opens following new lows than I do when the market opens flat.

Does Turnaround Tuesday Apply to Shocking Gaps Down

Look like the SPY is going to open down more than it has dropped any single day so far in 2012.  This can be startling to market participants.  Many may be caught flatfooted.  Of course Tuesday is the #1 day to see a Turnaround.  But does it apply when the market gets a shock at the open?  I ran the test below to see.

It does not appear Tuesday give us a hig probability play.

I also ran the test on all days using a 20-day requirement instead of 10.  Similar non-edge.  Should be an interesting day...

Large Gaps Down From 50-day Highs

Big gap down from yesterday's high.  Below is one way to look at it.

These results were similar to a few scenarios I ran.  The evidence suggests no edge in trying to buy the low open.  In fact there may be a bit of a downside edge from open to close today.  Historically, things have gotten worse throughout the day.

1% Gaps To Start A Month

With futures up over 1.5% as I type pre-market, we’re seeing an unusually large gap up to start the year. Below is a list of the 8 other instances since 2003 that SPY gapped up at least 1% to start the month.

A few notes:
8/2/10 was the only instance that gapped up as much as 1.5%.
Looking out over next several days there was typically a pullback following day 1.
None of the other instances started off the year.

Evidence isn’t overly compelling, but we could see some add-on buying during the day today.

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.

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.

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.

Large Gaps Up After Very Large Down Days

In my last post I looked at how SPY has performed from open to close when a 2% gain was followed by a gap up of at least 1%.  Today we are seeing another 1% gap up, but this time it is on the heels of a 2% loss.  So I thought it would be interesting to examine this scenario.  Results of the last test suggested the open to close action favored a move lower, which is what played out on Tuesday.  Below is the general stats for setups like today.

Not a ton of instances.  At this point we can see what appears to be a moderate upside edge.  Let's take a look at the list of instances to see if we can learn anything more.

Most striking to me here is that there was not a single instance that closed within 1.5% of its open.  Volatility after the bell was huge.  Traders looking for intraday moves should have plenty of action today.

Large Gaps After Large Up Days

SPY is gapping up large this morning after rising 2.3% yesterday.  Below is a study showing how SPY has performed intraday under similar circumstances over the last 8 years.

Based on other gap studies we have seen, the negative results are no surprise.  Traders may want to be careful of chasing long entries at the open.

Big Gaps Up After 2 Strong Days of Selling

After 2 hard days of selling the SPY looks to be gapping up strong this morning.  I looked back at other times that the SPY gapped up big after 2 large down days.  Below are the results since 2003 of buying all instances at the open and then selling at the close.

There appears to be a bit of an inclination to follow through on the gap to the upside.  Most of the instances were quite volatile, and all of them pulled back at least 0.4% below the open at some point during the day.  Most of them also took place during 2008 when volatility (both intraday and overnight) was elevated.

Large Gaps Down After 3 Up Days

This volatility continues this morning with a big gap down.  The study below shows performance for the day following large gaps that occur after 3 consecutive up days.

These stats do not appear encouraging for the bulls.  Below I have listed all instances.

This view isn't any better.  It appears there is some potential for another ugly day. I'd use caution buying today.

Mondays 2% Gap Down

I've shown before that 2%+ gaps down almost always bounce at some point in the next few days.  The last time I reviewed this can be found here:

http://quantifiableedges.blogspot.com/2011/03/2-gaps-down-other-disasters.html

This morning I added a few filters and looked at just what might be expected on the day of the gap.  This first study shows what has happened when the 2% gap down occured after a 100-day low.

Low instances but a possbile upside tendency.  But next is the bad news.  The study below looks at 2% gaps down on Mondays.

Tough call this morning.  I think we should see a bounce in the next few days, but it may not be immediate.

A Look At This Mornings Gap Probabilities

The gap down this morning is coming after a recovery attempt yesterday. I ran a few tests to see how the day has played out in the past under similar circumstances. The market has been moving around quite a bit this morning so I am showing 2 sets of results below.

The 1st one looks at times the market gapped down at least 1%.

Winners outnumber losers 7-3 but the losers are so much larger on average that the net expectation is about flat.

This next one looks at gaps between 0.5% and 1%.

Here again the odds appear to favor a rise over the course of the day. Losers were a bit larger here as well, but not nearly to the same degree.

Bottom line is that it appears likely the gap down will be bought up during the day, but if it isn’t then this could turn into another huge down day.