5 Day Low and Gapped Down

Yesterday (on the 23rd) SPY closed below the previous day’s 5 day low. Even more, SPY gapped down and never traded over the previos day’s low. Some days back I wrote an article about a possible strategy to buy SPY when it closed below the prevoius day’s 5 day low. That strategy is in my opinion quite robust (and suggest to buy on the close). However, what happens when it gaps down? Here are the results from 2005 to present:

Avg per trade #trades #wins Annualized %
1 day 0.22 28 18 0.9
3 days -0.17 28 16 -0.7
5 days 1.17 28 20 7.16
10 days 0.26 26 16 0.98

As you can see it’s very erratic, but also very few trades.

However, looking at my anatomy of gaps in SPY, fading a gap AFTER a gap down has been very good:

Total in % #fills #wins Avg % long % short #fills long #fills short
5.21 33 30 0.158 3.21 2.00 12 21

Very good results, but not surprisingly it’s long which is best. All longs hit target. A good example of reverting to the mean.