AnalyzingGaps

for
ProfitableTradingStrategies

MTAWebcast
June8,2011

JulieR.Dahlquist,CMT
RichardJ.Bauer,Jr.,CFA,CMT

Dahlquist&BauerMTAWebcastJune8,2011
 Overview

Whatisagap?
Howfrequentlydogapsoccur?
q y g p
Howdowemeasureperformance?
What is the impact of other factors?
Whatistheimpactofotherfactors?
Howcanstudyinggapsimprovetradingperformance?

Dahlquist&BauerMTAWebcastJune8,2011
 What is a gap?
Whatisagap?

Gapup todayslowishigherthan
yesterdayshigh

Gapdown todayshighislowerthan
yesterdayslow
Two gap down days
Twogapdowndays

Dahlquist&BauerMTAWebcastJune8,2011
 What is a gap?
Whatisagap?
IIncandlestickterminologygapsare
dl ti k t i l
calledwindowsbecausethey
createanopeningintheprice
p g p
movement.

Agapupisarisingwindow.
i ii i d

A gap do n is a falling indo

Agapdownisafallingwindow.
Note:agapcouldbeapennyorseveraldollars

Dahlquist&BauerMTAWebcastJune8,2011
 How frequently do gaps occur?
Howfrequentlydogapsoccur?

Russell3000stocks(asofJanuary2011)
R ll 3000 t k ( fJ 2011)
Timeperiod:January1,2006toDecember31,2010
(1259 trading days)
(1259tradingdays)
20,611gapups
17 435
17,435gapdowns
d
Atleast1gapupon91.6%ofthedays
A l
Atleast1gapdownon88%ofthedays
1 d 88% f h d

Dahlquist&BauerMTAWebcastJune8,2011
 How frequently do gaps occur?
Howfrequentlydogapsoccur?

1133ofthestockshadatleastonegapup
1135ofthestockshadatleastonegapdown
375 gap up stocks on April 1, 2009
375gapupstocksonApril1,2009
409gapdownstocksonFebruary17,2009

Dahlquist&BauerMTAWebcastJune8,2011
 How do we measure performance?
Howdowemeasureperformance?

Day0
D 0 dayofthegap
d f th
Day1 thedaybeforethegap
Day1 thedayafterthegap
1 day return assumesbuyingattheopenof
1dayreturn assumes buying at the open of
day1andsellingatthecloseofday1.
3 day return assumesbuyingattheopenof
3dayreturn assumes buying at the open of
day1andsellingatthecloseofday3.

Dahlquist&BauerMTAWebcastJune8,2011
 How do we measure performance?
Howdowemeasureperformance?

UsedSPYreturnstoadjustformarket
U d SPY t t dj t f k t
movement
1daymarketadjustedreturn the1day
returnforthegappingstockminusthe1day
SPYreturn

Dahlquist&BauerMTAWebcastJune8,2011
 Whatistheimpactofotherfactors?
Day0candlecolor

Ifastockhasgappedupanditcloseshigher
If t kh d d it l hi h
thanitopened(awhitecandle),perhapsthe
gapissignalinganuptrend.
i i li t d
Ifastockhasgappeddownanditcloseslower
thanitopened(ablackcandle),perhapsthe
gapissignalingadowntrend.

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
Day0candlecolor

Note:a
valueof
0.041is
0 041%
0.041%.

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
Day0candlecolor

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
Day1candlecolor

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
Day1candlecolor

Note:ifyouwereusingashortingstrategythenyouwould
wantnegativereturnsinthistable.

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
Gapsize

Note:forthe20daymarketadjustedreturnthereturns
uniformlyincreasewithgapsize.

Dahlquist&BauerMTAWebcastJune8,2011
 Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
Gapsize

Note:possibleshortingstrategyafterlargegapdown,especiallyonblack
candledays
dl d

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
3dayvolume

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
3dayvolume

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
30dayvolume

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
30dayvolume

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
10daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
10daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
30daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
30daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
90daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011
Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
90daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011
 Howcanstudyinggapsimprovetrading
performance?
f ?
Since gaps reflect a jump in price they probably convey some useful information
Sincegapsreflectajumpinprice,theyprobablyconveysomeusefulinformation.

Ourresearchsuggests:

1. Gapupstocksthatgaponawhitecandlemaybesignalinganupwardmoveinprice;
however,thereverse(forgapdowns)isnottrue.
h th (f d )i tt

2. IfDay1isablackcandledayandisfollowedbyagapuponawhitecandleday,thenanupward
movemayfollow.However,onceagain,thereverse(forgapdowns)isnottrue.

3. Forgapupstocks,alargergapsizeismorebullish.Largergapsizeforgapdownstocksis
bearish,butonlyforthefirstfewdays.Gapsizedoesseemtohaveanimpact.

4. Theimpactofvolumeisunclear,butitdoesseemtohavesomeimpact.

5. Therelationshiptomovingaveragepriceisunclear,butitalsoseemstohavesomeimpact.

Dahlquist&BauerMTAWebcastJune8,2011
 Payingattention
to gaps may not
togapsmaynot
makeyou
rich,butit
probablycan
b bl
improveyour
performance;
mindthegap!

Dahlquist&BauerMTAWebcastJune8,2011
Somerecentexamples
AOL

Dahlquist&BauerMTAWebcastJune8,2011
Somerecentexamples
ZQK

Dahlquist&BauerMTAWebcastJune8,2011
Somerecentexamples
NEE

Dahlquist&BauerMTAWebcastJune8,2011
Somerecentexamples
DIS

Dahlquist&BauerMTAWebcastJune8,2011