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Today I ran a scan that looked at time since 1995 in SPY when price closed down 5 days in a row and the 5th day had a gap down greater than 2%.
There were only 4 instances all shown in the table above. The next day showed an average gap up of 2%. The Jan 2008 instance showed a large gap down the following day, but that was a great short term buy.
Note that from the close of the signal day (today), the average 1 week maximum gain on an ATM call option was nearly 300%. All 4 instances showed 160% or great gains.
The maximum gains over the next 5 trading days all were greater than 4.6% with the lowest amount being the Jan 2008 instance. In my opinion, that is probably the closest fit to our early stage bear market/volatility environment.
Looking at the average closing return following those instances, we see that at 4 days, and 8 days, all 4 instances showed positive closes relative to the signal day. This would suggest that our market currently could have an upward current into Friday.
So we are truly in a rare environment here, but as is the case, the more extreme conditions get, the more sharp and impending the rebound.
Futures are up as I type this evening.
From past instances it seems likely that the market will make a run back for the 198 level on SPY this week to fill today/Monday's big gap down. The stats are certainly supportive of that idea given the few instances that are comparable.
Pete
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