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Back-filling The Gaps, Better Now Than Later

There's an old saying in trading/investing about how most gaps are back-filled at some point in time. The statistics on what percentage of gaps are filled range depending on the source but the author of this article from 2013 claims to have conducted a backtest spanning 24 years showing that over 91% of all gaps were eventually filled.

As I'm still positioned net short & even added more exposure yesterday when the only two broad stock indices that I'm short, IWM & QQQ were back-filled, I'd rather see those gaps back-filled sooner than later. Back-filling those gaps yesterday opens the door for the next leg down without any unfinished business (i.e.- leaving behind an unfilled gap).

Here's a snap-shot of the major index tracking ETFs (1 minute charts as of yesterday's close) with the yellow dashed lines showing Friday's closing values (i.e.- the tops of yesterday's gaps). Despite a virtually flat close, only 3 of the 11 sectors that comprise the S&P 500 closed positive yesterday & of those, the volume on all 3 was pathetically low, a sign of non-confirmation when stocks move higher on low/below average volume. Also worth noting is the fact that only one major US stock index, the thinly diversified (only 30 stocks) Dow Jones Industrial Average, was the only major US stock indices that failed to fully back-fill yesterday's gaps although the Dow did manage to take home the dubious distinction of its worst losing streak since 2011.

The recent trend has been one of deteriorating internals in the market, with fewer & fewer mega-cap stocks, namely the top components of the tech heavy Nasdaq 100, doing most of the heavy lifting while the majority of stocks move lower. That deterioration of market internals is also evidenced by the fact that the majority of stocks in the Nasdaq Composite were trading below their 50-day moving average as of yesterday's close. As this chart of the $NAA50R (Nasdaq Percent of Stocks Trading Above Their 50-day Moving Average) shows, closing out long or going short when the $NAA50R has dropped below 50% has paid off either immediately or at the very worst, after a small draw-down before the short trade went on to pay off.

$NAA50R daily March 27th close

$NAA50R daily March 27th close

Today should be interesting. With yesterday's gaps already back-filled, with the dip-buyers & nervous shorts continue to bid the market higher with more buying & short-covering was yesterday's gap back-fills simply evidence that the downtrend that kicked-off with the March 1st highs is starting to gain some momentum by opting to immediately back-fill yesterday's gaps in order to get that out of the way & open the door for the next leg down without leaving any unfinished business behind?

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Mar 28, 2017 9:01am|Categories: Equity Market Analysis|Tags: , , , , , , , , , |7 Comments

7 Comments

  1. stock51 March 28, 2017 9:09 am at 9:09 am

    The picture will not open

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    • rsotc March 28, 2017 9:18 am at 9:18 am

      That chart image won’t expand nor is there a “read more” link at the end of the truncated excerpt because this is a front page post. Front page posts will show up here in the trading room (identified as such in the title following my username: “rsotc wrote a new post, ….”.

      To view a front page post along with any chart images from the trading room, you need to click on the title of the post that follows my username, in this case “Back-filling the Gaps, Better Now Than Later”, as that is a hyper-link which will open the post.
      I realize that’s confusing & I’ll have my programmer look into hyper-linking the thumbnail image below the excerpt as well.

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  2. jegersmart March 28, 2017 9:28 am at 9:28 am

    Hi Randy
    On the subject of gaps, in my own experience (at least according to the hundreds of gaps I have recorded of over the years) the proportion of gaps that are closed in the same timeframe is even higher than what you quote. I have to say that my own records span a long timeframe but at the same time have been updated when I remember to do so, so are by no means complete.

    I said the same regarding GDX just over a year ago in early Feb, as there is still a gap around 15.37-15.77 or so on the daily. I do believe that will also be closed at some point in the future, and I was and am bullish since mid to late 2015 on gold and miners, I would have preferred for it to be closed back then…..

    We will see how long it takes, but am pretty certain it will be closed.

    Good luck all. J

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  3. rksleung March 28, 2017 12:27 pm at 12:27 pm

    Now that QQQ has overshot its gap, does it mean QQQ won’t go down to 127 as predicted before?

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    • rsotc March 28, 2017 8:07 pm at 8:07 pm

      The fact that QQQ back-filled the gap & then some vs. reversing at the top of the gap doesn’t negate the scenario of a move down to 127. As the tops of gaps are resistance, it certainly would have helped the bearish case had QQQ turned down & sold off impulsively after back-filling Monday’s gap but the near-term trend in QQQ is still sideways with the near-term trend on every other US index still bearish. Also keep in mind that off all the major US stock indices, QQQ is the least diversified of all, even the 30 stock Dow Industrials as technology stocks account for over half of the Nasdaq 100 with the index not very representative of the US economy the sector weightings, not just tech heavy but with minimal to no inclusion of several key sectors of the economy such as energy, financials, basic materials, industrials, real estate, utilities, etc..:

      QQQ Fund Sector Allocations (%):
      Consumer Discretionary 21.41
      Consumer Staples 6.38
      Energy —
      Financials —
      Health Care 11.42
      Industrials 2.12
      Information Technology 57.41
      Materials —
      Real Estate —
      Telecommunication Services 1.26
      Utilities —

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  4. malejandro1972 March 28, 2017 1:54 pm at 1:54 pm

    makings of a Double Top possible???

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    • rsotc March 28, 2017 8:11 pm at 8:11 pm

      Yes although if QQQ rallies a bit more & turns down around the recent highs put in just a week or two ago, while that would technically be a double-top, typical double-top patterns (that mark significant tops) usually have two peaks spaced out months apart. Again, certainly possible & more important that the Q’s right now (although I do put a significant weighting on them as the leading index) is whether or not all other US indices that are in near-term downtrends are able to reverse course & also make a run at their previous highs.

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