Back to Back 1% Gap Ups In SPY

Currently the market is in an interesting and somewhat unique position as it has gapped up 1% or more 2 days in a row.

My studies of gaps have shown back to back gap DOWNS to be a bullish short term indicator.  So I wondered whether back to back gap ups was a bearish indicator.

On average after the close of the second day, returns were mildly negative over the coming 1-2 weeks.  So the summary would suggest that we may not expect much more upside reward than downside risk after today, when considering the next 2 weeks of action.

Now, I went a bit further with this scan, and out of a total of 20 back to back 1% gap ups since Sept 1995, I used the trade so far today to look at the future returns of the instances were today was strong after the open.

So I filtered out only the instances where SPY did not trade down more than 1% from the opening priced during the day.  The results left 9 instances which are reflected in the table below.

Click on Table to Enlarge

So these are all unique instances and shows a strong negative skew to forward returns for the next 2-4 weeks. 

I would suggest this implies that our correction is probably not "over" yet, or at least we could experience another retest of the recent lows before a possible uptrend.

The instance in 1999 was occurring at a 52 week high which is not our scenario.  The other instances are more similar to our market, with the year 2000 December instance being the most similar to ours.

I would say this study suggests that we expect/plan for lower lows to come into late January or sooner.