Do you like high volatility days? Here's what tells you if Wednesday will be one

We're looking to open higher this AM on the heels of strength in the Euro markets.  I looked at upward gap opens in SPY (SPY | Quote | Chart | News | PowerRating) from 11/02 - present (N = 698).  We've had 58 upside gap opens > .50%.  These gaps were filled during the day on 10 of the 58 occasions, but the average price change from the day's open to the close was -.15% (23 up, 37 down).  So, interestingly, there is no edge buying the open and holding to close after a upward gap open.

Perhaps more important than the trend following the gap is the relative degree of action.  Among the gap up days, we see a correlation of .45 between the size of the opening gap and the size of the day's range from high to low.  Large opening gaps tend to produce high volatility trading days.  The average range from the day's open to the day's close on upside gap days has been 1.56%.  This compares to an average range of 1.15% for the remainder of the sample and an average range of .93% during 2005.  Of the 58 gap days, 49 produced daily ranges in excess of 1%, which would be about 12 S&P points in the present market.  The bottom line is that large opening upside gaps tend to produce good trading swings intraday, but don't necessarily lead to bullish trending days.

Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.