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Technical Analysis . . . Gaps are Meant to
"Filled"
An old expression amongst traders and technical analysts is that
that "Gaps are meant to be filled". Before we jump into the validity of this
saying and what we can learn from examining the "Gap" we need to define both a
"Gap" and "Filled".
Gap Defined
There are two basic types of "Gaps": Up Gaps and Down
Gaps. An up-gap is defined as a day session price range in which today's low is greater
than the previous trading sessions high. A down-gap is defined as a day session range in
which the high for the current session is lower than the previous sessions low.
Up Gap
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Down Gap
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The Gap is defined as the range which is not filled in. For example, the
Up Gap presented above was between the high of the 4th bar to the low of the 5th bar, or in this example from 390 to 392. The Down Gap presented above covers the range
from the low of the 4th bar to the high of the 5th bar, or from 390
to 386.
"Filled" Defined
A Gap is considered filled when prices close the gap, or trade
through the entire gap. An up gap is considered filled when prices trade at or below the
low point of the "up gap". Using our example above, on day 5 the market made a
gap from 390 to 392, and settled at 396 1/2. If this market were to trade at or below 390,
the gap would be considered "filled". A down gap is considered
"filled" when prices trade at or above the highest point of the gap, or the low
on the day previous to the "gap". Using our example above, a gap occurred on day
5, from 386 to 390, and the market settled at 385. This gap would be considered filled
when prices traded up to 390.
Studying Gaps
We examined the last decade of prices (1989 to 1998) to see if
"Gaps are Filled" for the Corn, CBOT Wheat, and Soybean markets. For Corn and
CBOT Wheat we used the July contract from December through June and the December contract
from July through November. For Soybeans we used the July contract from November through
June and the November contract from July through October. Only one gap for any given in
each market was recorded and examined.
Over the last decade, Corn Futures have made 328 gaps, CBOT Wheat
futures have gapped 201 times and the Soybean futures market has formed 295 Gaps. This
data period covers roughly 2,520 trading sessions, so gaps have occurred on the charts 13%
of the time for Corn, 7.9% of the time for CBOT futures and 11.7% of the time for Soybean
futures. With in 10 trading days of a gap occurring, prices filled the Gap 214 times in
the Corn market (65.2%), 145 times in the CBOT Wheat market (72.1%) and 199 times in the
Soybean market (67.5%). Based on these figures, the old expression "Gaps are meant to
be Filled" is certainly filled.
Corn Futures Gaps Examined
Of the 328 Gaps in the corn market in the last decade, 150 were
Up-Gaps (gap days low is higher than the previous days high) and 178 were Down-Gaps (gap
days high is lower than the previous days low). With in 10 business days, 65% of the
Up-Gaps were filled and 66% of the Down-Gaps were filled. A break-down of the filling of
the gaps at 1, 3, 5, 7, and 10 trading sessions is as follows:
|
Total
Filled |
1 |
2-3
days |
4
-5 days |
6-7
days |
8-10
days |
| Up Gaps |
97 |
39 |
33 |
13 |
8 |
4 |
| Down Gaps |
117 |
42 |
39 |
17 |
14 |
6 |
As you can see by examining the above table, over 60% of the Gaps
are filled with in 7 days of the gap occurring on the chart., with almost half of the Gaps
being filled with in 3 days of the gap occurring. The quickness in filling the gaps is
most likely due to the fact that the bulk of the gaps are rather small: 237 of the gaps
examined in the last decade were less than 2 cents, and only 40 were greater than 4 cents
(size of the gap is defined as the distance between the two extremes of the gap (Up Gap:
Low of Gap Day - High of Previous Day; Down Gap: Low of Previous Day - High of Gap Day).
Based on this, it is only logical that the smaller gaps are filled faster than the larger
gaps:
Gaps % Filled by Size of Gap
| (in cents/bu.) |
|
% Filled |
1 day |
2-3 days |
4-5 days |
6-7days |
8-10 days |
| Less than -8 |
|
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
| -6 to -7.75 |
|
60% |
0% |
40% |
40% |
60% |
60% |
| -4 to -5.75 |
|
33% |
0% |
20% |
27% |
33% |
33% |
| -2.0 to -3.75 |
|
59% |
18% |
27% |
45% |
50% |
59% |
| 0 to -1.75 |
|
71% |
28% |
51% |
60% |
68% |
71% |
| 0 to 1.75 |
|
71% |
38% |
57% |
61% |
68% |
71% |
| 2 to 3.75 |
|
67% |
8% |
38% |
58% |
63% |
67% |
| 4 to 5.75 |
|
50% |
0% |
33% |
50% |
50% |
50% |
| 6 to 7.75 |
|
0% |
0% |
0% |
0% |
0% |
0% |
| 8 to 9.75 |
|
60% |
0% |
40% |
60% |
60% |
60% |
| 10 to 11.75 |
|
0% |
0% |
0% |
0% |
0% |
0% |
| Greater than 12 |
|
100% |
0% |
0% |
100% |
100% |
100% |
Based on the above, it is safe to say that "Gaps" in the Corn
futures market tend to be filled with in 7 business, with larger gaps taking longer.
CBOT Wheat Gaps Examined
Since 1979, the CBOT Wheat market has made 201 gaps. 95 of the
gaps were Up-Gaps and 106 of the gaps were Down-Gaps. 67 of the 95 Up Gaps (71%) were
filled with in ten business days, and 78 of the 106 Down-Gaps (74%) were filled with in 10
business days. A break-down of the filling of the gaps at 1, 3, 5, 7, and 10 trading
sessions is as follows:
|
Total Filled |
1 day |
2-3 days |
4-5 days |
6-7 days |
8-10 days |
| Up Gaps |
67 |
23 |
31 |
4 |
7 |
2 |
| Down Gaps |
78 |
32 |
29 |
9 |
4 |
5 |
Over half of the Gaps in the CBOT Wheat market were filled within 3
trading days, and over 60% of the Gaps were filled with in 5 trading sessions. Much like
the Corn market, the bulk of the CBOT Wheat gaps were very small in size, with 160 of the
201 (79.6%) being less than 2 1/2 cents. Due to the frequency of these small gaps, it is
only logical that they be filled very quickly.
Gaps % Filled by Size of Gap
| In cents/bu. |
|
% Filled |
1 day |
2-3 days |
4-5 days |
6-7 days |
8-10 days |
| Less than -12.50 |
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
| -10 to -12.25 |
100% |
100% |
100% |
100% |
100% |
100% |
| -7.50 to -9.75 |
100% |
0% |
100% |
100% |
100% |
100% |
| -5 to -7.25 |
|
50% |
0% |
0% |
0% |
50% |
50% |
| -2.50 to -4.75 |
71% |
14% |
57% |
57% |
57% |
71% |
| 0 to -2.25 |
|
75% |
33% |
59% |
67% |
71% |
75% |
| 0 to 2.25 |
|
79% |
29% |
68% |
71% |
76% |
79% |
| 2.5 to 4.75 |
|
44% |
6% |
31% |
38% |
44% |
44% |
| 5 to 7.25 |
|
40% |
20% |
20% |
20% |
40% |
40% |
| 7.50 to 9.95 |
|
67% |
33% |
33% |
33% |
67% |
67% |
| 10 to 12.25 |
|
50% |
0% |
0% |
50% |
50% |
50% |
| Greater than 12.50 |
100% |
0% |
100% |
100% |
100% |
100% |
Again, the old saying "Gaps are meant to be Filled" scored
true for the CBOT Wheat market, with the speed of the closing of the gap being directly
proportional to the size of the gap.
Soybean Gaps
Examined
The most volatile member of the grain complex is the Soybean
market, so it is only logical that it has displayed the most Gaps in the last decade. Of
the 295 gaps on the Soybean charts since 1979, 199 have been filled. Soybean gaps have
been fairly evenly distributed between Up-Gaps and Down-Gaps, with 144 Up-Gaps and 151
Down-Gaps. 101 of the total 144 Up-Gaps have been filled within 10 trading sessions (70%)
and 98 of the 151 Down-Gaps have been filled with 10 trading sessions. A break-down of the
filling of the gaps at 1, 3, 5, 7, and 10 trading sessions is as follows:
|
Total Filled |
1 day |
2-3 days |
4-5 days |
6-7 days |
8-10 days |
| Up Gaps |
101 |
42 |
31 |
17 |
7 |
4 |
| Down Gaps |
98 |
36 |
25 |
19 |
10 |
8 |
Like the other markets examined, the bulk of the gaps in the Soybean
market are samll, with 222 of the total 295 Gaps being less than 5 cents. As such, over
half of the Up-Gaps are filled within 3 business days and half of the Down-Gaps within 5
business days. Within 7 trading sessions of the gap, 63.3% of all the gaps are filled.
However, the large gaps, especially to the downside do not tend to be filled with in 10
trading sessions. Only 38% of the Gaps less than -10 cents to the downside have been
filled with in 10 trading sessions, while less than half of the upside gaps greater than
15 cents have been filled with in two weeks. The size of the gap is very important in the
Soybean market. Below is a distribution of Gaps by size with percentage filling:
Gaps % Filled by Size of Gap
| In cents/bu. |
|
% Filled |
1 day |
2-3 days |
4-5days |
6-7 days |
8-10 days |
| Less than -25 |
|
0% |
0% |
0% |
0% |
0% |
0% |
| -24.75 to -20 |
|
0% |
0% |
0% |
0% |
0% |
0% |
| -19.75 to -15 |
|
n/a |
n/a |
n/a |
n/a |
n/a |
n/a |
| -14.75 to -10 |
|
38% |
6% |
13% |
13% |
38% |
38% |
| -9.75 to -5 |
|
61% |
28% |
11% |
39% |
50% |
61% |
| -4.75 to 0 |
|
69% |
37% |
48% |
59% |
64% |
69% |
| 0 to 4.75 |
|
74% |
18% |
59% |
69% |
72% |
74% |
| 5 to 9.75 |
|
68% |
8% |
36% |
50% |
59% |
68% |
| 10 to 14.75 |
|
75% |
0% |
42% |
67% |
75% |
75% |
| 15 to 19.75 |
|
50% |
0% |
0% |
25% |
50% |
50% |
| 20 to 24.75 |
|
33% |
0% |
33% |
33% |
33% |
33% |
| Greater than 25 |
|
0% |
0% |
0% |
0% |
0% |
0% |
Based on the above, the old wisdom that "Gaps are meant to be
Filled" hold true for the Soybean market as well, however in the event of a large
Gap, don't count on it. However, Gaps greater than -12 cents to the down side have only
occurred 12 times in the last decade, and upside gaps greater than 15 cents have only
occurred 8 times. In the event of one of these rare occurrences, ignore the old traders
saying.
Corollary to Gaps must be
Filled…. Gaps predict Direction
Another frequently bandied about expression by the chartists and
traders is that gaps predict direction after being filled. On the whole, this is
marginally true, with Up Gaps leading to higher prices 50% of the time in the Corn market,
49.5% of the time in the CBOT Wheat market, and a scant 42.4% of the time in the Soybean
futures market. However, the time of the year incorporated with the direction of the Gap
can be a good indication of future direction.
Gaps tend to occur during the months with the most uncertainty. For the
grains this equates to the weather markets of June, July and August.
# of Gaps by Month and Type
|
Corn
Up |
Corn Down |
Wheat
Up |
Wheat Down |
Soybean Up |
Soybean Down |
| Total |
150 |
178 |
95 |
106 |
144 |
151 |
| Jan |
13 |
9 |
9 |
9 |
9 |
10 |
| Feb |
6 |
9 |
2 |
9 |
6 |
6 |
| Mar |
8 |
9 |
8 |
9 |
7 |
8 |
| Apr |
11 |
11 |
14 |
8 |
12 |
9 |
| May |
11 |
17 |
8 |
10 |
9 |
11 |
| Jun |
23 |
23 |
14 |
13 |
21 |
24 |
| Jul |
21 |
33 |
13 |
13 |
25 |
28 |
| Aug |
20 |
17 |
10 |
10 |
16 |
16 |
| Sep |
8 |
14 |
6 |
7 |
11 |
12 |
| Oct |
13 |
13 |
6 |
8 |
9 |
10 |
| Nov |
9 |
15 |
1 |
8 |
8 |
7 |
| Dec |
7 |
8 |
4 |
2 |
11 |
10 |
# of Times Gaps have Correctly Predicted the next 10
Trading Sessions direction
|
Corn Up |
Corn Down |
Wheat Up |
Wheat Down |
Soybean Up |
Soybean Down |
| Total |
75 |
94 |
47 |
55 |
61 |
73 |
| Jan |
8 |
5 |
4 |
4 |
4 |
6 |
| Feb |
5 |
3 |
1 |
4 |
5 |
1 |
| Mar |
4 |
6 |
5 |
4 |
3 |
4 |
| Apr |
3 |
6 |
5 |
6 |
4 |
3 |
| May |
6 |
8 |
2 |
8 |
1 |
7 |
| Jun |
12 |
11 |
4 |
8 |
7 |
11 |
| Jul |
7 |
24 |
9 |
10 |
8 |
22 |
| Aug |
13 |
6 |
7 |
3 |
11 |
4 |
| Sep |
3 |
8 |
4 |
0 |
3 |
8 |
| Oct |
7 |
6 |
1 |
3 |
5 |
3 |
| Nov |
4 |
8 |
1 |
5 |
6 |
1 |
| Dec |
3 |
3 |
4 |
0 |
4 |
3 |
Total Change over Next 10 Trading Sessions by Month and
Gap Type
|
Corn
Up |
Corn Down |
Wheat
Up |
Wheat Down |
Soybean Up |
Soybean Down |
| Total |
-241.75 |
-253 |
13.5 |
40 |
-800.25 |
-161.125 |
| Jan |
-5.25 |
4 |
-1 |
11.75 |
-53.25 |
0.75 |
| Feb |
21.5 |
14.5 |
9.5 |
10.75 |
10.75 |
59.75 |
| Mar |
34.25 |
-34.25 |
44.5 |
17.75 |
-4 |
-27.25 |
| Apr |
-24.75 |
22 |
95.75 |
-12.5 |
-97 |
59.75 |
| May |
15.75 |
-9 |
-42.75 |
-80.5 |
-133.5 |
-133 |
| Jun |
-54.75 |
-14.75 |
-76.75 |
57.75 |
-77.75 |
0.875 |
| Jul |
-241.25 |
-219.25 |
-40 |
-83.75 |
-403.5 |
-346.75 |
| Aug |
31 |
12.5 |
28.75 |
35.75 |
44.25 |
115.75 |
| Sep |
3.5 |
-28.5 |
12.25 |
74.5 |
-128 |
-65.25 |
| Oct |
-17 |
-7 |
-45.75 |
34 |
19.75 |
31.5 |
| Nov |
-13.75 |
-5.5 |
11 |
-39 |
17 |
82.75 |
| Dec |
9 |
12.25 |
18 |
12 |
5 |
60 |
Based on the above traders should head the following:
- Follow Upside Gaps in the Month of February in the Corn and
Soybean markets. Aggressive Traders may also wish to "fade" downside Gaps.
- Follow Upside Gaps in the Month of March in the CBOT Wheat
Market.
- During the month of April, "fade" all Gaps in the
Soybean market as Gaps have historically been exhaustive in nature.
- As the winter Wheat matures in May, follow any downside gaps
in the CBOT Wheat market during May.
- July has historically seen more Gaps than any other month, and
all the Gaps tend to offer good opportunities to establish short positions: follow
downside gaps and "fade" upside gaps in July.
- Follow upside Gaps in the Corn market in August, and
"fade" downside gaps in the Soybean market.
- Follow upside gaps in the Wheat market during November as
planting premiums are built into the winter Wheat market, and "fade" downside
Gaps in the Soybean market as harvest pressure is typically overdone.
The above are a few simple rules, which grain traders may wish to
examine closer to see if they can be fit into your trading aresenal. If you have any
suggestions for future articles, please feel free to drop an e-mail to grainmaster@grainguide.com
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