Big Down Day: What Happens at the Open?

Quick note before Tuesday's open. A reader asked me what happens at the open after the market has moved down sharply. I looked at SPY from March, 2003 to the present (N = 758) and found 106 instances in which the market was down .75% or more from open to close. The next day's open averaged a gain of .09% (72 up, 34 down)--considerably stronger than the average overnight move of .04% (415 up, 343 down). There is thus no evidence that weak markets during the day session spill over to the overnight and, in fact, we see a modest bounce more often than not in the overnight. Given the tendency of strong downside momentum markets to continue weakness in the short run, this may set up a trade of selling strength early the next day.

Thanks, BTW, for the kind comments sent to me re: the recent Trading Markets article.