Tuesday, January 17, 2006

Double Down: What Next?

Today's market gapped lower at the open and closed lower. Now it appears likely that we'll gap lower tomorrow AM on the NASDAQ 100 Index (QQQQ), given the weak Intel news. What has happened during the trading day after we've gapped lower two days in a row?

Since January, 2003 (N = 765), we've only had 1o occasions in which a day that has closed lower and gapped down at the open has been followed by a second gap down. From the open of the market that second day (which would correspond to Wednesday in current trade) to the close, the market averaged a loss of -.74% (2 up, 8 down). That's quite a bit more bearish than the average open to close change of .01% (393 up, 373 down) for the sample overall.

In short, despite the market's tendency to reverse weakness in the short run, two consecutive gaps down have not, on average, led to a rebound during the subsequent trading day. Although it might be tempting to jump into the market at the open and look for bargains, on average this has not been a winning strategy since 2003.