Wondering what’s next? Here’s a few thoughts from Adam Warner (who was buying Friday), citing Rob at Quantifiable Edges.
Fishing For Clues
Courtesy of Adam Warner at Daily Options Report
So what of this upside pre-open gap today, in the midst of a downtrend? This, from Rob at Quantifiable Edges.
Buying gaps up of 0.75% or more during downtrends was actually profitable. In this case, 58% of the 105 instances finished with the SPY closing higher than it opened.
……I suspect short-covering is a big reason that large gaps tend to spark additional buying in downtrends but not in uptrends. Stops get blown through overnight and when they see the market getting away from them, panic-covering ensues.
Regardless of the reason it appears when the market is below its 200ma the easy money is typically made not by fading the large gap up, but by looking to go long. Fading large gaps up appears to be more fruitful in uptrending markets than down. These results seem to go against conventional wisdom and provide another example of a lesson that many traders may need to “un-learn”.
If you wait it out though, you’ll, likely you’ll get a better opportunity to buy, also via Quantifiable Edges.
Typically when the market gaps up by massive amounts it tends to pull back at some point in the next few days. Below (click thru to see) are listed all instances where the SPY gapped up by 2% or more. In 19 of 20 cases it posted a close below the gap open within the next 5 days:
I’m taking a measured approach, selling some here and hoping it’s an incredible mistake. My screen says the VIX is 71.40 still, which doesn’t seem right, but we’ll see. Nov’s in SPY trading a high 50’s volatility. If you’re of a mind to fade volatility here, I’d look at Nov.
…..OK, VIX 64.75 now, that seems more accurate.
