Daily Commentary - Posted on Wednesday, December 1, 2010, 10:42 PM GMT +1

1 Comment


Dec Wednesday 1

Unfilled Gap Up and Consolidating

On Wednesday’s session the market more than fulfilled all positive seasonal tendencies (e.g. the first week in December, see Seasonalities: The Market’s Performance in December) and favorable short-term setups (see ) right at the start of the month, closing higher +2.12% and leaving an unfilled gap up of +0.86% (today’s low above the previous session’s high). 484 stocks being part of the S&P 500 penetrated their previous session’s high while only 11 stocks penetrated their previous session’s low, the 5th occurrence (only) since 1990.

In addition, the ratio of S&P 500 Advancing / Declining issues and the ratio of S&P 500 Advancing / Declining volume closed above the 20 mark, the 18th occurrence since 1990 (probabilities for trading higher 3 sessions later are slightly above, but probabilities for trading higher 5 sessions later are slightly below at-any-time chances for a higher close 3 and 5 sessions later respectively).

But when the SPY left an unfilled gap up greater than +0.75% in the past, buying power was regularly exhausted for the short-term, and historical probabilities and odds are tilt in favor of lower prices over the course of the then following at least three sessions.

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 had left an unfilled gap up greater than +0.75% in the past.


(* 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 12 out of the last 14 and 8 out of the last 9 occurrences ;
  • … the SPY never looked back and did not post a single close below the trigger day’s close over the course of the then following 5 sessions on 4 out of 20 occurrences, but did not manage a single close above the trigger day’s close over the course of the then following 5 sessions on 7 out of 20 occurrences.

Conclusions:

From a statistical and historical point of view, after 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).

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, Quant Blogs. Quant Blogs said: Trading the Odds: Unfilled Gap Up and Consolidating http://bit.ly/fy7LYp […]

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