I made a scan this morning looking at the past performance of the following set-up:
- new 52 week high
- yesterday gapped up and closed positive on the day
- today's price opened outside of the upper bollinger band
- today gaps up more than 0.2%
So the idea here is a market that has been strong and hits a new 52 week high on a modest (or larger) gap up.
The short of it is than the intraday downside risk was about 4 times as big as the upside potential after the open (which would be today in our example). And the average open to close change was -0.6% roughly, with data going back to Sept 1995 in SPY.
So plugging this into a trading strategy it is pretty simple to see that shorting or inversing at the open had a positive expectation in the past. My method for the trade involves looking at not just the open to close change, but also the drawdown and run up during the open time of the trade. In this case the expectation was increased by setting a profit limit order of 1.75% to 2.5% gain.
Also the average forward returns were negative on a closing basis for the 3 days beginning with the trigger day/today. 10 out of 16 instances showed 1% or greater max losses over the next 5 days after the CLOSE of the trigger day/today.
So from today's opening value it appears that the downside risk is predominant throughout the remainder of the week.
As a side note, with stocks gapping up today and moving up a bit in the morning after the open, the VIX has not followed its normal pattern of declining. In fact it was up nearly 5% in the opening hour of trade today. I have showed in the past that when the VIX pops higher, while the SPY also rises, the forward returns have been skewed to the negative in past instances.
The skew in MAX loss to MAX gain has been about 2:1 over the following 2 weeks after a signal like this. Currently the day hasn't closed, so I am not saying the study is active, but it has that look to it so far.
But a simple and profitable trade strategy in the past would have been to enter short/inverse and set a limit profit order basis the SPY etf of 1.25% gain and a stop loss of 1.25% loss. Then exit at the end of the time period in question if the trade had not filled an exit already. The maximum profit on a closing basis would have been at 8 days forward of the signal day, or next Thursday's close.
Now the stats on these etf trade are such that a large amount of leverage could be used correctly based on performance stats, so a 3x inverse etf or a deep in the money option are other possibilities to take advantage of the set-up here.
I know this is looking at short times frames and low volatility moves, but the example shows how profits can be potentially made with consistency when the time is right. We will see what happens.