Daily Commentary - Posted on Thursday, December 2, 2010, 11:19 AM GMT +1

1 Comment


Dec Thursday 2

Gaps Up and Chances for a Gap Fill

This is a short follow-up to my previous posting Unfilled Gap Up and Consolidating, this time looking at historical probabilities that an unfilled gap up in combination with a huge up-day for the markets might be closed over the short-term.

On Wednesday, December 1, 2010, the SPY closed higher +2.12% and left an unfilled gap up of +0.86% (today’s low versus the previous session’s high).

Table I below shows all occurrences and the SPY‘s historical performance (since 01/01/1990) over the course of the then following 1, 2 , 3 , 4 and 5 sessions, assumed one went long on close of a session where the SPY closed higher at least +1.50% and left an unfilled gap up greater than +0.75% in the past.

This time column ‘# sessions gap fill‘ does not show the number of sessions until a close below the trigger day’s close occurred but the number of sessions – if any – until the gap was filled (means the SPY posted an intraday low below the high of the session immediately preceding the trigger day). A hyphen (‘‘) indicates ‘no gap fill during period under review‘, in this event over the course of the then following 5 sessions.


(* no close below trigger day’s close during period under review)

It is interesting to note that

  • … the SPY closed lower (than the trigger day’s close) 3 sessions later on 14 out of 18 and 11 out of the last 13 occurrences, but
  • … the SPY did not penetrate the intraday high of the session immediately preceding the trigger day (gap fill) on 2 out of every 3 occurrences, means historically there is a 2:1 chance that the gap will not be filled over the course of the then following at least 5 sessions.

Conclusions:

From a statistical and historical point of view, after posting a higher close greater than +1.50% and leaving an unfilled gap up greater than +0.75% probabilities (winning percentage) and odds (expectancy) are tilt in favor of some consolidation over the course of the next three sessions (in this event probably until Monday, December 6), but chances for closing the gap over the short-term are slim.

Successful trading,

Frank

Disclosure: No position in the securities mentioned in this post 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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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

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

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Comments (1)

 

  1. […] This post was mentioned on Twitter by Frank Hogelucht and Michael, Quant Blogs. Quant Blogs said: Trading the Odds: Gaps Up and Chances for a Gap Fill http://bit.ly/gIy9N3 […]

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