How SPY typically trades after a gap up/down on NFP report

• Posted by DynamicHedge
• on October 2nd, 2014

The NFP report (Employment Situation) is released on Friday before the open and here’s what we know:

• EVERYONE will be watching the report.
• Whether you realize or not, investors on virtually all time frames have place big bets on the report (economic health of the US).
• The numbers are overrated and overhyped but still more than capable of moving markets (see previous two points).
• Report itself is based on a data set so large that the variance in the report is impossible to predict.

There is significant evidence to suggest that even the most seasoned and connected analysts struggle to produce accurate estimates. And even when they nail the number the market can react entirely opposite to what most people assume. So what’s left to discuss then? The reaction — or an outcome based “if this then that” statement. Since the release occurs before the market open, the futures market typically has a volatile reaction before the more liquid cash markets. The move higher or lower in the futures will produce a gap in the cash market charts. The gap instantly creates PnL changes for traders and impacts how they interpret the data. A big gap up is a positive report and a big gap down is a negative report. Feedback loops like this drive markets, especially in short timeframes.

We ran two scenarios through our pattern recognition algorithms at https://www.marketmemory.com/. One where the market gaps up, and one where the market gaps down. The output below is the trading activity immediately after this gap until the close of the market day.

Here’s the dominant patterns in the last three years when the $SPY gaps 0.5% or higher off the open:

Link to analysis (so you can see statistics table and alter parameters).

Most dominant pattern is to continue higher, just via different paths.

Stats:

Here’s the dominant patterns in the last three years when the $SPY gaps -0.5% or lower off the open:

Link to analysis (so you can see statistics table and alter parameters).

More of a split decision here. Downside is particularly volatile (read: gnarly) .

Stats:

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