In the April 19, 2010 blog I showed a compelling study that examined large drops on Fridays.  Both the Crash of ’29 and the Crash of ’87 happened on Monday.  The Crash of ’87 is still remembered by many traders that are active today.  There was a strong selloff on Friday and then all hell broke loose on Monday.  But since then strong Friday selloffs have commonly been followed by bounces on Mondays.  Perhaps this is due to the fact that fear of a crash causes what might otherwise be an ordinary selloff to become exaggerated and overdone on Fridays.  Or perhaps it is just that people don’t want to hold over the weekend.  Whatever the reason, the tendency to bounce has been very strong.  I’ve updated that 4/19/10 study below.

The numbers here are all very impressive and suggest a strong bullish bias.

In an older study in the Subscriber Letter I looked at bounces after SPX is strongly short-term oversold as measured by RSI(2).  What I found in that letter was that lower-volume instances on the first day of the bounce have performed much better over the next few days than higher-volume bounces.  I won’t rehash the whole study here, but I will show performance following higher volume bounces like Thursday.

As you can see, it appears that such bounces suggest a short-term downside edge.

One reason the blog has been slow this week is that I am preparing for my trip to Atlanta next week to speak at the MTA meeting there.  If you’re in the Atlanta area and would like more info on my talk you may check out the link below.  You don’t need to be an MTA member to attend, but you should consider joining.

https://www.mta.org/eweb/dynamicpage.aspx?webcode=atlanta

The price action in SPY showed some real strength in that it gapped up, never filled, and closed above the open.  When the market is coming off an oversold level in an uptrend and is still not overbought, this pattern will often be followed by further gains.  This was shown in the subscriber letter last night (click here for a free trial).  And in the 5/22/12 letter I also showed that when the SPY pattern occurs following a short-term low it appears to provide a bullish edge, but when it occurs after an intermediate-term low then the bullish inclinations no longer hold true.  The current setup is bullish and I have updated the stats below.

The reliability and the size of the moves are both impressive.  This study suggests the rough start this morning is likely to be overcome in the next few days.

Short-term strength is often followed by short-term weakness, but when that short-term strength is unusually impressive, it can create a situation where that extreme strength will beget more strength. When the market leaves an unfilled up gap that is considered a sign of strength.  When it does it 2 days in a row and closes at a 50-day high, that can be considered exceptional strength. That is what happened on Friday, and past performance is shown in the study below.

The size of the follow-through isn’t terribly large. But it has been very, very consistent that at least some follow through was achieved in the next few days.

In the 7/19/12 blog I looked at the short-term importance of an unfilled upside gap accompanying a breakout.  With yesterday’s breakout occurring along with an unfilled up gapI have revisited that study below.

Results here are strong across the board.

Now let’s look at instances where the 50-day high breakout was not accompanied by an unfilled gap.  Interestingly, the number of instances was nearly the same.  This study also appeared in the 7/19/12 blog and is updated.

As you can see these moves to new highs that don’t start with an unfilled gap are much less reliable over the short-term.

Technicians will often use the term “breakaway gap”.  This suggests the gap occurs on the same day as a base breakout.  The idea is that the new high causes excitement and the gap leaves a good amount of people sidelined or stuck short.  When it doesn’t immediately fill, it leads these people to chase and helps to propel the market even higher.