Longer-term Implications of Wednesday’s Upside Gap

After failing to close the January 3rd gap, S&P futures posted a second unfilled upside gap Wednesday to another new high. When sellers can’t drive the market lower to fill a gap and then a second unfilled gap appears, it’s usually a sign that sellers are overwhelmed. While conditions can often turn choppy after the second gap, the market has a good track record of rebounding from short-term weakness to settle higher one month later. The table below lists every instance since 2000 in which two unfilled upside gaps formed on the daily S&P futures chart within a one-month time frame, along with the performance of the S&P looking out twenty trading days. To qualify for inclusion, the first gap must remain unfilled when the second gap appears…

Two Unfilled Upside Gaps In a One-Month Time Frame
01/03/11 & 01/12/11… S&P500 ??? one month later
09/13/10 & 09/24/10… S&P500 +3.3% one month later
09/01/10 & 09/03/10… S&P500 +3.3% one month later
03/05/10 & 03/17/10… S&P500 +4.1% one month later
03/02/10 & 03/05/10… S&P500 +4.5% one month later
03/01/10 & 03/02/10… S&P500 +5.1% one month later
12/21/09 & 12/24/09… S&P500 -3.1% one month later (*)
12/10/09 & 12/14/09… S&P500 +3.0% one month later
11/09/09 & 11/16/09… S&P500 +0.2% one month later
10/08/09 & 10/14/09… S&P500 +0.8% one month later
10/06/09 & 10/08/09… S&P500 -0.1% one month later
07/30/09 & 08/21/09… S&P500 +3.8% one month later
07/15/09 & 07/30/09… S&P500 +4.5% one month later
04/02/09 & 04/09/09… S&P500 +8.5% one month later
11/24/08 & 12/08/08… S&P500 -0.3% one month later
04/16/08 & 04/18/08… S&P500 +2.5% one month later
03/18/08 & 03/24/08… S&P500 +2.8% one month later
12/21/07 & 12/24/07… S&P500 -10.2% one month later (*)
11/28/07 & 12/05/07… S&P500 -5.0% one month later (*)
04/16/07 & 04/20/07… S&P500 +2.3% one month later
04/03/07 & 04/16/07… S&P500 +2.3% one month later
06/15/06 & 06/29/06… S&P500 -0.1% one month later
10/31/05 & 11/17/05… S&P500 +1.7% one month later
05/18/05 & 05/26/05… S&P500 -0.6% one month later
10/01/04 & 10/04/04… S&P500 -0.4% one month later
11/24/03 & 12/01/03… S&P500 +3.8% one month later
03/13/03 & 04/02/03… S&P500 +4.3% one month later
10/15/02 & 10/17/02… S&P500 +2.7% one month later
10/11/02 & 10/15/02… S&P500 +0.2% one month later
11/13/01 & 12/05/01… S&P500 +0.5% one month later
11/05/01 & 11/13/01… S&P500 -0.3% one month later
09/24/01 & 09/28/01… S&P500 +5.6% one month later
04/10/01 & 04/18/01… S&P500 +3.4% one month later

There were a pair of heavy losses in ’07, but in general the market has displayed a consistent tendency to remain on firm ground over the next month. In 23 out of 32 cases since 2000, or 72% of the time, the S&P was trading higher 20 trading days later. That’s not significantly better than the 56% random odds, but of the nine times the S&P failed to rally, it finished down 1%+ one month later only three times out of thirty (or 10% of the time) compared with 19 instances of a 1%+ gain.  In the same period of time, the random chance for a drop of 1%+ over any twenty-day period was much higher at 37%. So when two unfilled upside gaps appear in a short period of time, we can infer downside potential is likely to be limited (<1%) over the coming month.

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

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