The Gap Guy

One of the great benefits of writing my short book, Understanding Gaps, has been the new friendships it has cultivated with fellow traders.  One such new friend is Marc Chaikin, the creator of a variety of well known technical indicators (e.g. Chaikin Money Flow, Chaikin Oscillator, etc.).  Marc is a fellow "gapper" and we like to exchange ideas. 

In a recent conversation, he suggested that I check out the performance of gaps when the daily price closes below the 600 EMA on a 5 minute chart and then gaps above it the next day, and vice versa (note: the 600 MA is equivalent to a 50 MA on a 60 minute chart.)  The concept being that a gap above or below a key moving average may indicate a change in market conditions / sentiment.

Here are the results of fading gaps in the E-mini S&P 500, since 1998, at the open, targeting gap fill, and exiting at the end of day if the gap did not fill.  I've added the results for the 600 SMA too: 

Two things stand out to me:

1) the win rate for all scenarios is significantly lower than that of gap fading in general - especially when the daily close is below the 600 EMA and then gaps above it the next day.  As such, this filter is valid and may be useful in helping identify gaps that are less likely to close on the same day.

2) why the disparity in the results of the simple versus exponential moving averages?  I'm not sure, but it is interesting nonetheless. 

Of course this begs the question regarding fading gaps that straddle other moving averages... I'll save that research for another day.