Unless the market is starting a new major trend, gaps created by massive buying and selling can provide good entry points for a quick gain. The recent upsurge has created these very opportunities. The last few days on the NASDAQ chart below illustrates what a gap "ups" and "downs" look like. It is important to note that I am referring to gaps that do not fill the same day that they are created.
After the price action this week, you may feel like you are missing the boat but recent history shows that the chances are good that price will reverse and fill those spaces created recently between the high of the previous day and the low of the current day.
Within the last year the NASDAQ has gapped up 25 times and gapped down 16 times. Of these 41 gaps, 97.6%, or 40 of 41, have filled. The one gap that did not fill occurred on July 27th. This was the beginning of the first real downtrend of the year.
Accepting the fact that all gaps do not fill, the question that comes to mind is, "how long does it take to fill a gap?"
The chart below shows clearly that 83% of the gap "ups" have filled within 20 days, and 88% of the gap "downs" have filled within 20 days.
You can see now why I worship the gap. It's like free money...what's the catch?
Approximately 85% of the gaps have filled over the last twelve months. What happened to the other 15%? The four non-conforming gap "ups" that refused to fill within a month took 24, 31, 50 , and 173 days to fill. One of the two non-conforming gap "downs" took 44 days to fill. The other one (the 41st mentioned above) is still waiting for NASDAQ 2850, or another 8.8% before a close can occur. Maybe the market will take care of that tomorrow morning.
This gap review has only a skimpy data set but the overall results correlate nicely with some of the other larger studies I have come across.
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