Double Gaps and Hens’ Teeth

I looked at the chart for SPY just now, and thought, “Huh…two days in a row that have gapped up. Wonder if that’s significant in any way?” By “gap,” I mean that today’s low was higher than yesterday’s high.

When this happens two days in a row, does it mean we should use quintuple leverage to buy everything we can? Sell at the opening bell and hide under a rock? Something else?

Turns out, this double-gap stuff is as rare as hens’ teeth. Since 2000, it has only happened eight times (including today). Therefore, NO CONCLUSIONS CAN BE MADE! There isn’t enough data to glean anything useful. But in case you were wondering, here’s how it would look if you bought at tomorrow’s open (“O1”), and held to tomorrow’s close (“C1”), the following day’s close (“C2”), or until five days later (“C6”). Again, nothing useful other than to ponder why this might be so rare.


Ticker Date/Time  O1 to C1  C1 to C2  C1 to C6 
SPY    10/4/2004  0.04      0.68     -1.16
SPY    12/24/2007 0.61     -0.66     -2.55
SPY    9/7/2012  -0.47     -0.19      1.77
SPY    12/9/2013 -0.13     -1.25     -1.29
SPY    2/17/2016 -0.57     -0.62      1.21
SPY    7/11/2016  0.20      0.18      0.77
SPY    9/12/2017  0.18      0.15      0.14
SPY    7/10/2018  ???       ???       ???


Pop or Drop part 1: Stock Behavior After Big Moves

When stocks are moving gently from one day to the next, there is often no discernible pattern. However when they start rockin’ and rollin’ one direction or the other, they show certain similarities.

I’m always curious how stocks behave when they show a significant drop, or when they pop upward unexpectedly. I ran some simple statistics and noticed a couple of things.

The Drop

First, I decided to look at what happens when stocks drop significantly. Rather than look at a fixed percentage, I instead used Average True Range of the stock. This shows the average price movement over the previous days, and is a measure of volatility. I took the ATR(20) before a drop, and corralled all the stocks that fell at least 3x the previous day’s ATR(20) value. I also looked at stocks that dropped at least 5x the previous ATR. Here’s a visual:

I then recorded the percent gain or loss for each day’s close following the drop, for five days after. This resulted in thousands of rows of data, but you know I gladly suffer through spreadsheet hell so that you can have pretty graphs.

It turns out there’s a clear pattern:

Continue reading Pop or Drop part 1: Stock Behavior After Big Moves

Divide By 20: One Year later

Happy New Year, one day early. Here’s wishing 2017 is successful for you in whichever way you define success.

Aren’t calendars wonderful? A couple of days ago, up pops a reminder on my calendar to revisit a post I did a year ago. At the very beginning of 2016, I wrote a post on whether yearly performance was mean-reverting, and found some interesting things. You might want to go back and take a look first, before you continue reading here.

Continue reading Divide By 20: One Year later

Chasing the Momentum-Burst Unicorn


A reader of my blog, Matt B., commented recently on an old post I’d written about momentum bursts. Like me, Matt was intrigued by the short 3 to 5-day momentum bursts he saw described time and again on Pradeep Bonde’s stockbee site. Those bursts look so pretty, so elegant, and more to the point: so profitable.

Continue reading Chasing the Momentum-Burst Unicorn

The Myth of Scaling Out

Photo by Winnifredxoxo. Used under Creative Commons License

A common tactic for some traders is to scale out of successful positions. The logic is this: I’ve already made some money, so I want to hold onto some of that. I’ll cash out a portion of my trade now, and see how the trade continues, but with reduced risk. You see this behavior with day traders, as well as long-term investors.

But it’s a fallacy.

And it’s costing you money.

Continue reading The Myth of Scaling Out