Wednesday, April 16, 2008

More Upside to Come?

Quantifiable Edges has an interesting post regarding large gaps up in downtrends. Rob writes,

Buying gaps up of 0.75% or more during downtrends was actually profitable. In this case, 58% of the 105 instances finished with the SPY closing higher than it opened. The net total of the movement from open to close was a gain of about 26%...

I suspect short-covering is a big reason that large gaps tend to spark additional buying in downtrends but not in uptrends. Stops get blown through overnight and when they see the market getting away from them, panic-covering ensues.
The Nasdaq gapped up more than 1% today. If there is indeed more upside to come, I would be surprised if the Nasdaq Composite can sustain prices above the top of the 3-month trading range around 2,400.