Gap Gap & Gap?

With S&P futures trading higher overnight, a review of upside gaps on the day immediately following an FOMC announcement is in order (upside gap in this case refers to an open above the previous day’s high.)  I found 31 occurrences since 1990, most of which had one thing in common – the opening gap usually proved to be a short-term selling opportunity…

S&P Futures Gap Up Post-FOMC Announcement
11/04/10… S&P futures close +1.0% from open two days later
04/29/10… S&P futures close -1.1% from open one day later
03/17/10… S&P futures close -0.2% from open two days later
01/28/10… S&P futures close -1.6% from open same day
04/30/09… S&P futures close -1.1% from open same day
03/19/09… S&P futures close -2.6% from open same day
03/19/08… S&P futures close -2.9% from open same day
09/19/07… S&P futures close -0.1% from open same day
12/13/06… S&P futures close -0.2% from open same day
10/26/06… S&P futures close -0.5% from open one day later
06/30/06… S&P futures close -0.4% from open same day
08/10/05… S&P futures close -0.4% from open same day
03/17/04… S&P futures close -0.7% from open two days later
08/13/03… S&P futures close -0.8% from open same day
06/27/02… S&P futures close -1.4% from open two days later
05/08/02… S&P futures close -1.1% from open two days later
01/31/02… S&P futures close -2.1% from open two days later
03/31/99… S&P futures close -2.2% from open same day
08/19/98… S&P futures close -0.7% from open same day
05/20/98… S&P futures close -0.4% from open one day later
02/05/98… S&P futures close -0.6% from open same day
07/03/97… S&P futures close -0.5% from open one day later
12/20/95… S&P futures close -1.0% from open same day
05/24/95… S&P futures close -0.2% from open same day
12/22/93… S&P futures close +1.0% from open two days later
08/18/93… S&P futures close +0.2% from open two days later
02/04/93… S&P futures close -0.1% from open two days later
07/02/92… S&P futures close -0.4% from open same day
08/21/91… S&P futures close +2.4% from open two days later
03/27/91… S&P futures close -0.6% from open same day
02/07/91… S&P futures close -0.7% from open same day

In 23 out of the last 24 occurrences, and in 27 out of 31 occurrences since 1990, S&P futures settled below the opening price either the same day or within the next couple of days, significantly greater than the 67% random chance. This will go into effect on an open above SPM 1354 on Thursday.

Speaking of gaps, it’s also worth noting that just three sessions after the big unfilled upside gap on April 20th, S&P futures posted a second unfilled upside gap on Tuesday. That’s a sign of strong upside momentum that’s likely to keep stocks on firm footing over the coming month. 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 flat-to-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
04/20/11 & 04/26/11… S&P500 ??? one month later
01/03/11 & 01/12/11… S&P500 +2.8% 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 24 out of 33 cases since 2000, or 73% 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 33 (or 9% of the time) compared with 20 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, as just occurred on 4/20 and 4/26, 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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