Monday Gaps From A Low

The theme lately has been gaps, and we're starting off the week with another.

We've mentioned many times in the past that the tendency for markets is to form medium-term (1-3 month) bottoms on Monday/Tuesday. It's rare to see them form on Fridays.

It's just a tendency, but still it has been twice as likely to see a low on Monday than Friday. For that to hold true this time, it would mean we have to close lower today or tomorrow than we did on Friday.

Figure 1 shows the returns in SPY every time it gapped up at least 0.5% on a Monday after it had closed at a 3-month low on Friday.

We can see that it tended to add to the gains during the day, closing higher than the open 7 out of 10 times. This was drawing in buyers who were worried that they missed the bottom.

In the shorter-term, their buying panic didn't tend to pay off. The S&P reversed and closed lower on Tuesday 7 times and that tended to persist for a couple of days. Returns in the short-term were quite weak.

Again, this is just a pattern-based tendency that suggests chasing potential strength on Monday will be a challenge in the days ahead.