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

Down Gap

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 4^th bar to the low of the 5^th bar, or in this example from 390 to 392. The Down Gap presented above covers the range from the low of the 4^th bar to the high of the 5^th 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

If you enjoyed this article, be sure to sign up for a free 2 month trial subscription to grainguide.

THE DATA CONTAINED HERE IN ARE BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. CFEA WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN.

DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES POSITION.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.

NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.