filled. These gaps retraced by at leasthalf 78 percent of the time and retraced between 90 and 100 percent 62 percent of the mornings studied. Gaps in the 2- to3 - p e rcent range were somewhat lesslikely to be filled.Only 14 percent of the gaps (in the“Overall” column) closed between zeroand 9 percent, which includes thosemornings when price immediatelymoved in the opposite direction of thegap closure, creating what is known as a“gap and run.”The second part of the analysisexpl ored how quickly gaps re ve rse d.
The gaps typically closed half way (50percent) by 9:55 a.m. Of the gaps thatclosed completely, 67 percent of themdid so in the first 30 minutes of the trad-ing session, and 86 percent closed by theend of the first hour of trading (10:30a.m. ET). The likelihood of additionalclosure declined substantially after thefirst hour of trading. Gaps that were stillopen after 60 minutes closed only 4.5percent of the time. Also, the success ratediminished on days when economicnews was released 30 minutes after themarket open, at 10 a.m. ET.The third portion of the analysis iden-tified important time markers during theg ap- reversal period. Figure 2 (below)shows the typical time markers for gapreversals. Just after the open, the majorindices tended to continue to move in thedirection of theopening price forthe first one to 10minutes. A f terthis initial rally(or sell-off), themarket turnedand began toclose the morn-ing gap. Thisreversal, on aver-age, began sixminutes after theopen, at 9:36 a.m.ET. The typicalreversal wasmaximized at9:53 a.m. ET.An appro x i-mately four-minute countertrend move (or “jig,”which often fakes out traders into cover-ing positions early) typically occurredaround 9:42 a.m. and lasted until approx-imately 9:47 a.m.
Before the bell:Pre-market review process
The first step in trading the MGR is antic-ipating the direction of the openingmove. Usually two hours before the mar-ket opens a reliable gap can be identified by checking the pre-market stock indexf utures quotes on CNBC or Bloomberg
TV. (Minute by minute pre-market indexf utures quotes are also available through
the Chicago Mercantile Exchange We bsite, www.cme.com.) Whether these con-tracts are trading up or down in the earlymorning can give you an indication of the possible direction of the stock marketopen.
Second, make note of how the futuresare affected in the pre-market by anyeconomic reports released at 8:30 a.m.E T. This will indicate whether thefutures are strengthening or weakeningin pre-market trading. Make a finalcheck of the futures at 9:10 a.m. (20 min-utes prior to the market open).
ACTIVE TRADER •
Morning open — up gapMorning peak on average9:36 a.m. EST
The primary time “milestones” in early trading show theretracement to the previous close typically maximizesaround 9:53 a.m.
FIGURE 2A MORNING UP-GAP TIME MARKERS
The time markers for the typical down gap are the sameas those for up gaps.
FIGURE 2B MORNING DOWN-GAP TIME MARKERS
Prior dayclosing pricePrior dayclosing priceMorning open — down gapTrade is maximized9:53 a.m.Trade ismaximized9:53 a.m.Price “jig” —usually9:42-9:47 a.m.Price “jig” — usually9:42-9:47 a.m.Morning bottomon average9:36 a.m. ESTGap size% of gap closed+/-1%+/-1 to +/-2%+/-2 to +/-3%Overall0-9
The columns show morning gaps of different sizes.The rows indicate how much of the gaps were filled.
TABLE 1 MORNING GAP ANALYSIS