Distribution Day after a Gap Down

Thursday’s selloff on the heels of Wednesday’s unfilled downside gap for S&P futures suggests there’s more downside in store, either immediately or after a short-term bounce. Historically, a one-way move lower immediately following a downside gap generally leads to a bit more follow-through over the next 1-3 sessions. In the table below is every instance since 1990 in which S&P futures closed down in excess of 0.5% and posted a lower high and lower low immediately following an unfilled downside gap (defined as high < previous day’s low)…

S&P Futures -0.5%, Lower High & Low after Unfilled Downside Gap
08/12/10… ???
06/30/10… Lower S&P close one session later
06/07/10… No lower S&P close within three sessions
05/05/10… Lower S&P close one session later
06/16/09… Lower S&P close one session later
03/03/09… Lower S&P close two sessions later
02/18/09… Lower S&P close one session later
10/07/08… Lower S&P close one session later
05/21/08… Lower S&P close two sessions later
02/06/08… No lower S&P close within three sessions
01/16/08… Lower S&P close one session later
01/21/05… Lower S&P close one session later
09/23/04… Lower S&P close two sessions later
04/29/04… Lower S&P close one session later
01/21/03… Lower S&P close one session later
09/24/02… Lower S&P close four sessions later
07/22/02… Lower S&P close one session later
03/12/01… Lower S&P close two sessions later
02/20/01… Lower S&P close one session later
07/19/00… Lower S&P close two sessions later
05/22/00… Lower S&P close one session later
06/24/99… Lower S&P close one session later
05/06/98… Lower S&P close one session later
08/30/96… Lower S&P close three sessions later
07/08/96… Lower S&P close three sessions later
09/12/94… No lower S&P close within three sessions
06/21/94… Lower S&P close two sessions later
05/09/94… Lower S&P close two sessions later
03/25/94… Lower S&P close two sessions later
07/06/93… No lower S&P close within three sessions
04/22/91… Lower S&P close one session later
10/29/90… No lower S&P close within three sessions
10/10/90… Lower S&P close one session later
08/22/90… Lower S&P close one session later
08/17/90… Lower S&P close two sessions later
01/15/90… Lower S&P close two sessions later

In 22 out of the last 24 occurrences, and in 30 out of 35 (86%) since 1990, S&P futures posted a subsequently lower close within the next three sessions. That’s significantly greater than the 65% random chance for a close below today’s settlement within the next three days. ES volume was off 17% from Wednesday’s session, and coming on a down day for the S&P that almost triggered the 1-2 day buy setup recently discussed a week ago in this August 5th column. We didn’t meet the 20% threshold discussed in that column, but if stocks do manage to bounce on Friday, the price pattern above suggests the market is not out of the woods.

Categories : Archived EOD Commentary, End-of-Day Commentary

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