When a Huge Rally Means Bad News

09/09/2013 6:00 am EST


Rob Hanna

Co-Founder, Investiquant

A big SPY up day followed by a low-volume tight range has often led to trouble, says Rob Hanna of Overnight Edges, LLC.

Big intraday rallies like we saw on Wednesday that have been followed by tight, low volume consolidations like Thursday have often seen the market roll over. The study below looks at this setup. The parameters have only been met 10 previous times by SPY. I have listed them all along with their five-day returns below.

Click to Enlarge

Instances are low but the inclination so far is strongly bearish. The last seven occurrences closed lower five days later, and all by at least 1.3%. Additionally, the average drawdown is nearly 3x the average run-up. Even with the low number of instances, I think this study is worth some consideration.

By Rob Hanna, President, Overnight Edges, LLC

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