The Gap Guy

By my research, the S&P 500 futures have never generated an "island gap" to the upside in the past 10 years.  An island gap occurs when two gaps occur successively in opposing directions and each day's range does not trade within the prior days' range.  However, it did come very close on Thursday by trading up 3 points into Wednesday's trading range before rolling over and selling off the rest of the day. Though not technically an island gap, Wednesday's bullish Fed Day action and Thursday's dump left two unfilled gaps that were over 10 points in size - something else that has not happened in the past 10 years. See below:

Loosening the parameters a bit, there have been 8 times since 1999 in which two successive and opposite gaps failed to fill by 2 points or more.  (Since indices like the S&P are prone to filling, it is always noteworthy when it can't even come within 2 points of closing the gap.)  Following these unusual events, ALL of the next day's gaps filled the same day.  In fact, 7 of the 8 could have been successfully traded using just a 4 point stop.

But what about this pattern when the gaps simply fail to fill - regardless of by how much/little? Otis (my gap system) shows there have been 48 similar setups and 36 of them filled or finished profitably for a 75% win rate.  Interestingly, this pattern has occurred 14 times since 2007 with 12 of them resulting in winners.

With this unique pattern showing promising historical results and a signal from Otis showing that probabilities for a gap fill were very high (79%), I shorted Friday's small gap at the open.  Otis suggested an extended target i.e. below the prior day close, so after taking 3 points of heat, I scaled out for +4.5 pts and +8.25 pts.  Of course, it is a shame that I did not capture more of the sell-off, but it was nice calling it a day just 35 minutes after the open with some easy profits in the bank.