New High, Unfilled Up Gaps, but Weak Finishes

While the final numbers were good and the SPY left an unfilled upside gap, some traders may have been disappointed yesterday that the SPY finished in the lower part of its daily range. Historically, unfilled gaps and 20-day intraday highs as was put in on Tuesday have been followed by much more positive action when the rally closed meekly. Tuesday’s action actually appears bullish. This is something I examined just last week in the 1/4/12 Subscriber Letter. Below is an excerpt from that letter.

I ran a test of performance following unfilled upside gaps that make a 20-day high. Below I’ve broken out the results by times the SPY closed above the open versus times where it closed below the open.

First let’s look at those times where the finish was relatively strong:

There doesn’t appear to be any edge in either direction here. Now let’s examine times like the present where SPY closed below the open.

These results are substantially better than earlier where the finish was good. Rather than worrying about the weak finish bulls should be excited by it.