Given the nine day losing skid, the market went into last weekend approaching some fairly notable oversold levels. And while a near-term bounce could have been expected, it's unlikely that too many of us were predicting the huge bounce we saw on Monday.
The recent market action nudged us to go in search of prior instances where we saw big gap-up openings in the SPY after reaching oversold levels. One study we ran looked for gap-ups of at least 1% while the 14-day RSI on the SPY was in oversold territory (< 30) at the close of the prior trading day.
Observations (going back to SPY inception in 1993):
- Returns going out 3-months after a signal are incredibly favorable. This trade offers an "edge"
- Yesterday was only the 19th occurrence since 1993. We anticipated more.
- Almost all of these instances occurred during periods with elevated volatility
- Rarely did it mark the final bottom for the market during that particular period
- However, we did note that a tradable bottom wasn't far off in many cases
- Yesterday's signal was the first ever to occur within 5% of all-time highs (Friday's close at 2,085 is 4.95% from the all-time high of 2,193)
Below are some of the periods shown above: