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.

Last night in the Quantifiable Edges Subscriber Letter I examined short-term implications of strong 1-day rises in the Russell 2000 (RUT) while the S&P 500 (SPX) declined. I found that there appeared to be a decent upside inclination for the following day. This morning I played around with this concept a little further, added a filter that eliminated instances occurring in conjunction with intermediate-term lows, and ran the test out longer. What I found was quite interesting and can be seen in the stats table below.

While 1-day implications appear bullish, looking out over the next couple of weeks there has been a strong downward tendency. This may be worth keeping in mind over the next 10 days or so.

Friday was what I call a mega-outside day. It didn’t just make a higher high and a lower low (a regular outside day). It actually opened below the low of Thursday and closed above the high of Thursday. This is unusual, and in the past it has led to a dip over the next few days.

Stats here look strongly negative over the first 1-2 days, with most of the downside occurring on day 1.

Tuesday marked the 2nd day in a row where the QQQ made a lower low and a higher high.  Days that do this are often referred to as “outside days” because they trade outside the range of the previous day.  When QQQ has posted back to back outside days in the past, it has often been followed by a short-term rally.  I last showed this in the 11/10/10 blog.  I posted a link to that blog via Twitter yesterday afternoon.  I have updated the stats table below.

Results still appear strongly positive.

The market has seen a lot of finishes near the top of its daily range lately.  When the market consistently closes near the high of the day it suggests optimism on the part of traders. This end-of-day optimism is now at a level that suggests it is a bit overdone and there is a good chance of a pullback. The study below was last seen in the 7/5/12 blog and it exemplifies this concept. I have updated all of the statistics.

While the downside edge appears to remain in place for a full week, most of the edge has been realized over the 1st 2 days.

Note: To calculate the “8-day Average Closing % Range” I am simply measuring where in the daily range SPY closed each day. For instance if it traded at a low of $141.00 and a high of $142.00 and closed at $141.75, then it would have closed in the 75th percentile of the daily range. A close at $141.50 would have meant 50%.

I then take a simple moving average of the last 8 days. If that average goes from below 75% (where it usually is) to above 75%, the study is triggered.