Monday, November 28, 2011

What Today's Big Gap Up Means

Quantifiable Edges put a brief post today showing performance of SPY from open to close when it closed at a 20 day low yesterday and then gapped up 2% or more the next day.  Since 2003 there have only been 6 instances.  Most of them occurred in the context of the 2007-2009 bear market.  All but one led to lower lows not long afterward.  The one that didn't was on March 10th 2009 coming off the 2009 bear market low, the day after the closing low on March 9th.

Here is the take home.  The day of the gap up has consistently seen continued gains from open to close.  So expect today to be generally up.  The next day had a higher high in every case with almost all of them gapping up the next day as well.  However, most of them closed down the day afterward (which would be tomorrow in our case).  The two that didn't close down the following day were the March 10th one which obviously kicked off a bull market.  Also, the Nov 21st 2008 instance continued up the next day and led to a 5-6 week bear market rally.  The other 4 instances topped soon afterward 1 day, 1 day, 5 day, and 3 days later respectively.

In our current market, there is an unfilled large gap down from last week at 121.98 on SPY.  That is still a couple percent above current prices.  So here is what may be the most likely scenario......A continued move up today, and some further upside tomorrow to fill that gap down....then possibly a move to new corrective lows below last week's lows.

The Nov 21st 2008 instance rallied in typical seasonal fashion until the new year, before continuing to decline.  The seasonal tendency is so strong this time of year that maybe we should expect that this time around as well.  However, the market seems to me to be in a significantly different context when looking at the technical analysis and also from a qualitative standpoint.  In our case the weekly stochastics has just turned down from overbought.  5 out of the prior 6 instance occurred with the market coming off very oversold conditions as far as weekly stochastics.  The incident after the flash crash was shortly after an overbought stochastics.

So, my expectation is for most likely continued downside below last week's low.  However, possibly we may rally toward's year end.

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