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Where Will the S&P 500 Close If It Fills Its Opening Gap?

When an opening gap fills it can provide insight into where the market may close by the end of the session. Is it likely continue through the gap? If so, then holding part of your position for an extended target or until the session close could be rewarding.  Or, after filling, will it reverse and continue in the original direction of the opening gap?  If so, then “fading the fill” (as described in my book, Understanding Gaps) could be a good trade.

The opening gap direction, size and market condition (e.g. above or below the 10 Day Moving Average) can all provide clues and help determine the end of day probabilities and best trade idea.

The following table shows the historical, end of day, closing odds (2003-2013) for the ES (E-mini S&P 500 futures) for over 2,000 opening gaps.  Note: the ES highly correlates with the other major U.S indices: Dow 30, Nasdaq 100, and Russell 2000 (both futures and ETFs) so this data may be applicable and useful for trading these instruments too.

Posted in Extended Targets, Fade the Fill, Gap Basics, Targets, Tips | Comments Off

2012: A Historically Unusual Year for Trading the Gap

Over the past 5 years the Fed’s aggressive “quantitative easing” efforts have provided a significant tail wind to the markets.  Many traders have asked me if I thought this bullish bias had noticeably affected intraday price action, especially as it relates to trading the opening gap.  Prior to last year, I could find no statistical evidence.

On the surface, 2012 was a fairly typical year for fading the gap in the S&P 500 e-mini futures.  The overall win rate for fading all opening gaps > 1 point in the ES (targeting gap fill i.e. the prior day close, and using an end-of-day stop), was just shy of its historical average of 70%.

But note the sizable difference in the win rate and profitability of fading ‘down’ gaps (long trades) versus ‘up’ gaps (short trades):

(Commissions and slippage included)

Unusual, but not overly so.  Now look at how the numbers change when the same back-test is run using a reasonable intraday, volatility-based stop like we use at MasterTheGap.com (30% of the 5 day ATR, 5 pt min, 12 pt max):

Oddly, the variance was extremely large for fading down gaps, but minimal when fading up gaps. Now let’s look at how these variances compare to the past 10 years:

The yellow highlighting denotes ten year extremes, three of which were made in 2012.  Looking back another 4 years to 1999 (not shown), there has never been a single year with as low of a gap fill rate for ‘up’ gaps (64%), nor as many ‘down’ gaps that sold off after the open, before reversing and turning profitable by end of the day – a challenging year indeed for gap traders.

I believe these unusual extremes point primarily to the extraordinary Fed intervention (courtesy the U.S. government printing press), though the typical Presidential Election year bullishness likely contributed to some degree.  Further, the ever-present fears of a European meltdown certainly added fuel to the fire as persistent bears and short traders were forced to buy-to-cover with every late day and overnight rally.

While the markets performed outside of historical norms in 2012, the win rate for fading all gaps was no worse than 2007 and 2009.  And somewhat paradoxically, historical analysis was still extremely useful, if not crucial, for trading the gap successfully.  Case in point: only 23 of the 104 down gaps last year were historically attractive setups and worthy of fading.  Of these, I captured 14 (61%) winners and even managed to net a profit (1.2 profit factor).

And though the percent of ‘up’ gaps that filled was the lowest ever, a very high percentage (the highest ever) filled with minimal post open volatility.  As a result, the bulk of my profits for the year was made shorting up gaps:  27/39 wins (69%) and 1.3 profit factor.

Unusual market dynamics were clearly in play in 2012, but, fortunately, probability analysis made the weaker setups easily identifiable. The main impact for me was fewer compelling gap fade opportunities (though back surgery and my trading goal of being more selective played a role in my low trade frequency too).

As the Fed unwinds its manipulation extraordinary intervention, I expect we will see more high probability and high expectancy setups in the coming year.  And if we don’t, I’ll just take what the markets give me and dream about the good ol’ days when it was just me against the market.

Posted in Market Conditions, Miscellaneous, Volatility | Comments Off

Gap Size Impacts Odds

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Gap Basics, Gap Size | Comments Off

Fading the Gap By Day of Week

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Gap Basics, Seasonality | Comments Off

Where a gap opens relative to prior day’s range matters alot

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Gap Basics, Patterns | Comments Off

How Long Does It Take for the ‘average’ gap to fill?

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Gap Basics | Comments Off

Gaps Below the 200 dma

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Market Conditions | Comments Off

Gaps Above the 200 DMA

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Market Conditions | Comments Off

Gaps the day after an unfilled ‘down’ gap

Testing assumptions:

  • Fade the open (9:30 am ET)
  • Target = prior day close (i.e. gap fill)
  • 1,000 shares of the SPY
  • Oct, 2002 – October, 2011 (9 yrs)
  • Min .10 cent gap
  • Closed at 4 pm ET if gap not filled
  • No commissions or slippage included
Posted in Patterns | Comments Off