Utilizing Gaps While Trading E-Minis

Thirty-Three To Nine
That is our unofficial count of gap-open sessions in the ES futures from Jan 2nd to March 27th 2008. We did an informal study to see what the percentages are of open gaps being filled during pit-session hours. At the time of this writing, roughly 42 sessions in 2008 so far have opened with a gap of at least three index points width. Some considerably wider than that.

What we found by visual review was that 33 of those 42 morning gaps were filled by/before the end of trading at 4:15pm est. Some of them remained open until inside the final hour or in a few cases final minutes of trading before gaps were closed.

With the month of April 2008 just ending, the general percentages carried through unchanged. Most gaps filled, whether it happened inside the first half hour of trading or took the entire day to shut the window before closing bells rang.

What we can take from this sample study is that open gaps in E-mini markets tend to be filled intraday. The percentage is greater than half at any time. That of course does not mean one can merely sell into a gap-up open, hold all day without a stop and expect to be profitable by day's end.

The remaining 9 sessions of 42 in the first three months were gap & go varieties that ran much higher or lower than where they opened. So, a blind assumption of fading every gap-open direction = profits is not an equation that works.

Knowing that a majority of open gaps are filled intraday does give us a direction to lean which does have a decided edge right now. If a gap-down open has sold lower and lower all day, hits some measure(s) of support and starts to post higher lows up the chart, shorting into the rising tape is not a good idea. Buying dips while keeping an eye on the gap fill as a target has percentage odds behind it. The same is equally true for gap & go rallies that falter and begin posting lower-low swing failures along the way.

If there is a slight skew either way, it would probably be on the gap & go moves which counter any existing trend. In other words, a gap-up open and rally higher usually follows days of selling and extreme oversold conditions. Expecting that gap to be filled is less likely than a gap-down open after three straight closes in the red. Upside pressure is released on the gap & go rally from exhausted selling which does not have enough inertia left to reverse the relief rally intraday.

The highest percentage of gap fills intraday has always been multiple gaps in the same direction. If there is already one (or two) open gaps above a declining market, another open gap will almost always be filled intraday. Matter of fact, two open gaps either above or below current price action are more likely to both be filled intraday on a power surge move as opposed to remaining open for any length of time.

Additional Input
From a long-time client: Hi Austin... I have taken the time to analyze the gap data for the ES from the first of the year and also from 2/01/2005 which is how far back I have been tracking the gap open.

Since 01/01/2008: 68.5% of the gaps have been closed with an average of 3.5 points going beyond the open before closing the gap and a maximum of 13.5 pts. I had a total of 73 data points (was out of town a couple of days).

Since 02/01/2005: 68% of the gaps have closed with an average of 2.4 pts going beyond the open before closing the gap and a maximum of 26.5pt going beyond the open before closing the gap. I had a total of 761 data points. (Kirt L)

Lazy Gaps, Momentum Gaps
The holes in a chart which do not fill intraday usually fall into two distinct groups: low energy sessions and shocked sessions. First, the latter.

15min Chart: ES

April 1st session was a good example of true gap & go days. Price action opened +16.25 index points above the prior session close and never looked back for one iota of time all day. Straight up off the bell, straight up all day long. The pauses and pullbacks where orderly & measured, breaks out of consolidation were all upside.

Examples like this are the least probable scenarios for gap-open sessions. It is the lowest percentage of occurrence from all gap-open sessions combined. In other words, if you tried to build a trading career on directional trading with true gap & go sessions, you would fail a vast majority of the time.

15min Chart: ES

A greater percentage of open gap sessions are sometimes labeled "gap & flat" events. April 18th was a apt example of that. The close-to-open overnight hole was +20pts in width. After 6.75 hours of trading through the day session, price range held inside a 14pt total range. In other words, the open gap was wider than the entire session's range to follow. Sideways rolling, low energy, directionless. Anything directional that was going to happen got accelerated or outright blown away in the gap.

Summation
Nature hates a vacuum. Most voids are filled. Statistically speaking, the vast majority of gaps are closed intraday. Those that remain open are usually closed within a few sessions to couple of weeks later, with rare exceptions. Knowing where the open gaps, holes or "windows" are in your stock index charts usually points toward a strong magnet about to be revisited soon.

Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte's trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets