Quantifying Pekelo's 2nd consecutive gap
THIS POST ADRESSES GAPS UP
Price DATA reviewed: ES past 10 years (until 1st quarter of 1998)
Here's what I scanned for :
2 consecutive gap openings. where 1st gap was never filled and next day sees gap open in same direction
This was simply a comparison of the open of the regular futures session (9:30ET)to the close (4:00pm) of the previous session.
Gap on 2nd day had to be at least 1.25pts(>1.00)
Here's the code I used for the Gaps UP
---
[LegacyColorValue = true];
{File gap001up (strategy)}
vars:gapfill(0),gapone(0),gaptwo(0);
gaptwo=O-c[1];
if currentbar>2 then begin
if O-c[1]>1 and o[1] > c[2] and l[1]>c[2] then value1=1;
gapone= O[1]-c[2];
end;
if value1=1 then begin
If l<=c[1]+.75 then gapfill=1 else gapfill=0;
value1=0;
value2=1;
end;
If value2=1 then begin
Print(file("c:\101\gap001up.txt"), date:0:0,",",open:0:2,",",c[1]:0:2,","
,gapone:0:2,",",gaptwo:0:2,",",gapfill:0:0);
value1=0;
value2=0;
end;
---
RAW OVERVIEW of 2 consecutive Gaps UP (study did not include any data from Q3 2007, data reviewed was December 1997 through June 2007)
Since December of 1997, there have been 115 occassions when there has been a second gap up day after an unfilled gap up day. of those 115 events, 78 filled the gap of the 2nd day.
78/115 = 68% of the time 2nd consecutive gap fills (fills the gap created by the 2nd day's open).
If you added the gaps for both days together and divided by the close of the previous day (day of Gap 1), and that aggregate was over 1%, this occurred 47 times and gap of 2nd day was filled 25 times. 25/47 is 53% of the time. that's a coin-toss.
I think it's important to remember that it is much easier for the psychology of the marketplace to be bullish. When prices start moving higher, people are more willing to blindly buy (greed). AND when prices move decidedly higher, a herd mentality and short-covering adds to the fuel. The fact that aggregate gap > 1% (two days gap movement greater than 1% of c[1]) sees a fill of the 2nd day gap only 53% of the time is evidence of greed factor generated by higher prices.
As with the Gap Down study, I filtered Gaps Up for occasions when the aggregate pts gained in the 2 gap up openings was greater than 2% of the previous day's close and that occurred 9 times, with only 4 of those 2nd day gaps filled. 4/9 is 44% of the time. A coin-toss. This is additional evidence of the "herd" mentality that can overtake the markets. The bigger the gap gains, the less likely to fill 2nd day gap (very small difference, but you understand).
If bullish exuberance as measured in terms of aggregate gap gains over 1% and 2% is reflective of a bullish mentality that generates greed buying, what about the opposite?
I filtered the gaps by whether the 2nd day's gap was smaller than the 1st day's gap (measuring just raw points). In the 10years of price data, a gap up opening on the 2nd day that was smaller than the 1st day's gap up opening occurred 71 times, (smaller 2nd day gap meaning less enthusiasm?). Of those 71 events, 55 of them filled the 2nd day gap.
55 out of 71 is 77.5% of the time.
You can have fun with numbers testing all sorts of measures. I have included the columns I was using to filter data in columns I,J and K of the SUMgapUP002.xls file if you find something of interest share it. I did.
Overall, as far as I'm concerned, odds are roughly 7 in 10 that the gap fills (up or down) this however, does not offer any guidance what so ever as to what intraday prices do after the 2nd day's gap fills.
excel spreadsheet in next post.
