analyzing gaps for profitable trading strategies gaps for profitable trading strategies mta webcast...

Analyzing Gapsfor

Profitable Trading Strategies

MTA WebcastJune 8, 2011

Julie R. Dahlquist, CMTRichard J. Bauer, Jr., CFA, CMT

Dahlquist &Bauer MTA Webcast June 8, 2011

OverviewOverview

What is a gap?How frequently do gaps occur?q y g p

How do we measure performance?What is the impact of other factors?What is the impact of other factors?

How can studying gaps improve trading performance?


What is a gap?What is a gap?

Gap up – today’s low is higher than yesterday’s high

Gap down – today’s high is lower than yesterday’s low

Two gap down daysTwo gap down days


What is a gap?What is a gap?

I dl ti k t i lIn candlestick terminology gaps are called windows because they create an opening in the price p g pmovement.

i i i i dA gap up is a rising window.

A gap do n is a falling indoA gap down is a falling window.

Note: a gap could be a penny or several dollars


How frequently do gaps occur?How frequently do gaps occur?

R ll 3000 t k ( f J 2011)Russell 3000 stocks (as of January 2011)Time period: January 1, 2006 to December 31, 2010 (1259 trading days)(1259 trading days)

20,611 gap ups17 435 d17,435 gap downsAt least 1 gap up on 91.6% of the daysA l 1 d 88% f h dAt least 1 gap down on 88% of the days


How frequently do gaps occur?How frequently do gaps occur?

1133 of the stocks had at least one gap up1135 of the stocks had at least one gap down375 gap up stocks on April 1, 2009375 gap up stocks on April 1, 2009409 gap down stocks on February 17, 2009


How do we measure performance?How do we measure performance?

D 0 d f thDay 0 – day of the gapDay ‐1 – the day before the gapDay 1 – the day after the gap1 day return – assumes buying at the open of1 day return assumes buying at the open of day 1 and selling at the close of day 1.

3 day return – assumes buying at the open of3 day return – assumes buying at the open of day 1 and selling at the close of day 3.


How do we measure performance?How do we measure performance?

U d SPY t t dj t f k tUsed SPY returns to adjust for market movement

1 day market adjusted return – the 1 day return for the gapping stock minus the 1 day SPY return


What is the impact of other factors?Day 0 candle color

If t k h d d it l hi hIf a stock has gapped up and it closes higher than it opened (a white candle), perhaps the

i i li t dgap is signaling an uptrend.If a stock has gapped down and it closes lower than it opened (a black candle), perhaps the gap is signaling a downtrend.


What is the impact of other factors?Gap up stocksGap up stocksDay 0 candle color

Note: a value of 0.041 is 0 041%0.041%.


What is the impact of other factors?Gap down stocksGap down stocks

Day 0 candle color


What is the impact of other factors?Gap up stocksGap up stocksDay ‐1 candle color


What is the impact of other factors?Gap down stocksGap down stocksDay ‐1 candle color

Note: if you were using a shorting strategy then you would want negative returns in this table.


What is the impact of other factors?Gap up stocksGap up stocks

Gap size

Note: for the 20 day market adjusted return the returns uniformly increase with gap size.



Gap size

Note: possible shorting strategy after large gap down , especially on black dl dcandle days



3‐day volume


What is the impact of other factors?Gap up stocksGap up stocks30‐day volume



30‐day volume



10‐day moving average


What is the impact of other factors?Gap down stocksGap down stocks10 ‐day moving average


What is the impact of other factors?Gap down stocksGap down stocks30‐day moving average


What is the impact of other factors?Gap down stocksGap down stocks90‐day moving average


How can studying gaps improve trading f ?performance?

Since gaps reflect a jump in price they probably convey some useful informationSince gaps reflect a jump in price, they probably convey some useful information.

Our research suggests:

1. Gap up stocks that gap on a white candle may be signaling an upward move in price; h th (f d ) i t thowever, the reverse (for gap downs) is not true.

2. If Day ‐1 is a black candle day and is followed by a gap up on a white candle day, then an upward move may follow. However, once again, the reverse (for gap downs) is not true.

3. For gap up stocks, a larger gap size is more bullish. Larger gap size for gap down stocks is bearish, but only for the first few days. Gap size does seem to have an impact.

4. The impact of volume is unclear, but it does seem to have some impact.

5. The relationship to moving average price is unclear, but it also seems to have some impact.


Paying attention to gaps may notto gaps may not make you rich, but it

b blprobably can improve your performance; mind the gap!


Some recent examplesAOL


Some recent examplesZQK


Some recent examplesNEE


Some recent examplesDIS


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