Tuesday, April 14, 2009

Intel Set to Gap Down Wednesday Morning - What That May Mean

Click on Chart to Enlarge

Intel Corp. reported earnings after the close today and the stock traded down about 5.5% on the news. I had considered making a post today analyzing sentiment on INTC heading into earnings and suggesting that I thought it would most likely gap down. However, that type on info is not really the focus of this blog so I passed on it. What is the focus of this blog is trading short-term market moves, and INTC has proved in the past to have some potentially actionable correlations with the broader market. I have included a section of a historical study on the topic done in 2004 by Sentimentrader.com in the next paragraph. The take away for me is that large gap downs in INTC are suggestive of short-term to intermediate term market weakness which would make sense with some of the overly optimistic readings showing up recently.
The table above tells us that on the day that INTC gapped down at least 5%, the S&P ended up closing the day lower than the day before 20 out of 25 times, and suffered an average loss of over 1%. The next day, the market rebounded somewhat, but still on only 7 occurrences was the S&P better off. Actually, we can see that on average, it took up to 30 days for the S&P to regain the price level it was at prior to INTC taking such a large opening hit.

One of the interesting sidelights in the data is that there is actually a negative correlation between the size of INTC’s gap down open and the future performance of the S&P 500. That means that the larger the gap, the better the S&P did over the next few days. That seems counter-intuitive at first, but when we realize that these large gaps can mark some sort of exhaustion low, it makes a little more sense. Still, counting on it marking a low is a loser’s proposition, at least statistically. If you had bought the Nasdaq 100 at the open after these large INTC gaps, the majority of trades would have been losers even if holding up to 10 days later.

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