I saw James Altucher’s post on articles he’s tired of writing each year and one of his ideas piqued my interest. He says:
…if a Nasdaq 100 stock gaps down more than 5%, its a good buy for the day.
I thought I’d check out this idea further by doing some backtesting. Over the past 2 years there were 234 instances where a Nasdaq 100 stock gapped down by at least 5%. I tested going long right at the open and then closing the position at the close the following day.
It turns out there is an edge going long in this situation. Here are some stats:
Win Rate: 55%
Average Gain: 0.73%
Profit Factor: 1.55
So it definitely looks like there is some edge there. Whether or not it is worth trading is another question. More testing is required to determine that, but at this point it’s probably worth working on or at least continued study to see what can be learned from it.