Tuesday, March 6, 2012

March 6, 2012 - SPY Gap Downs of > 1%

This morning I read an article by Bespoke Investment Group about days where the SPY opens down 1% or more. It was a fantastic article and you can find the rest of the article by clicking here. The figure they created shows the probability of the SPY bouncing today to be about 36%. Their definition of bouncing is a positive increase from open to close. For the full trading day, only two days ended up in the green after a 1% dip to open the day. I am going to take this one step further and look at the day after each of these trading days to see if there was a bounce the next day.

The way I calculated % change was by taking the close price on the 1% gap down days, subtracted it from the close of the next day, and divided it by the close price on the 1% gap down day. I included the open price to show whether the direction changed during the course of the day.

Looking at the data I copied over from Yahoo! Finance, we can see that a 1% gap down does not necessarily mean that the next day will be a bounce. About 38% of the time the next day will be positive, but the average move is -.06%. Something to note though is that 3 of the 4 biggest changes were positive changes. These were on August 9th, August 11th, and September 7th. The only negative movement in the top 4 was on October 3rd.

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