Mind The Gap

Out of the blue today a thought entered my head (happens a lot) and I tweeted it to see if anyone had an answer. But that set off a tangent of my own as I started combing through old excel files of mine and updating data. Gaps have more or less become a part of trading as we truly trade in a global market. Here’s a chart of gaps from 2005 in $SPY. At first glance it appears that 2008 was more volatile overnight than now.

Milk Trader did some quick data mining and tweeted that since 1993, you are 1.73 times more likely to experience a gap in a bear market versus a bull market. I love stats like this because I’m always looking for an exception to them. If X has happened then Y happens 89% of the time, I’m looking for those 11% instances to help me gauge my risk.

So much information is out there on gaps and the volatility that is associated with such price action that it can be overwhelming. Here’s a few of my favorites that I found tonight and there are many more to read that I have waiting for me in my instapaper account. Please feel free to add your own in the comments section below.

Interesting research conducted by Michael Stokes over at the MarketSci Blog on gaps. There’s a plethora of information in the article but here’s the gist of the research:

  • Bullish markets play out in the overnight market and bears in the daytime market
  • Markets are generally much more volatile in bearish markets than bullish ones
  • Overnight gaps (as well as daytime moves) are also much larger in bear than bull markets.

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