Daily Commentary - Posted on Wednesday, October 13, 2010, 11:50 PM GMT +1


Oct Wednesday 13

SPY w/ Gap Up and Close below Midpoint

Just a quick note (and a short posting) with respect to the fact the the SPY (S&P 500 SPDR) left an unfilled gap up on Wednesday, October, 13, but closed below the midpoint of the session (below half the way between the intraday low and high).

Although traders regularly assume that this has negative implications for the underlying’s performance on the then following session, history suggests otherwise.

Table I below shows all historical occurrences and the SPY‘s (S&P 500 SPDR) respective intraday performance (since 01/01/1990) on the open (open vs. previous close), at the end of first hour of the session in comparison to the previous session’s close (1st hr. vs. prev. close), the high in comparison to the previous session’s high (high vs. prev. high) , the low in comparison to the previous session’s low (low vs. prev. low), and on the close (close vs. prev. close).

Especially noteworthy are the following pattern:

  • The SPY regularly shows some weakness early in the session (either a lower open or a lower price at the end of the first hour),
  • it seems less likely that the SPY will penetrate Wednesday’s intraday high on Thursday’s session (it did so on only 1 out of every 3 occurrences in the past),
  • it seems likely that the SPY will penetrate Wednesday’s intraday low on Thursday’s session (it did so on 31 out of 44 occurrences in the past), but
  • probabilities and odds are (again) tilt in favor of another higher close on Thursday’s session (leaving an unfilled gap up but closing below the midpoint of the session, the SPY closed higher the next day on 30 out of 44 occurrences, but regularly below the previous session’s high, means w/ limited upside potential).

And even on those occurrences where the SPY closed lower on the then following session, downside potential – a maximum loss of -0.84% – was always limited (not a single loss greater than -1.0% or more on 44 occurrences).


Therefore at least with respect to historical occurrences and respective probabilities and odds, it doesn’t seem wise to chase any weakness early in Thursday’s session and/or to bet the farm on a trend reversal on Thursday’s session.

Successful trading,


Disclosure: Long SDS (UltraShort S&P500) at time of writing.


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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs), do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).



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(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)


Comments (2)


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