How Often Do Overnight Gaps Get Reversed?
Overnight gaps are a common occurrence in financial markets, driven by news and sentiment shifts outside regular trading hours.
But how often do these gaps reverse during the same trading day?
What is a gap?
In this article, we define a gap as an opening price that is at least 0.2% higher or lower than the previous day’s close, and we look at how often such gaps are reversed intraday.
For example, if it opens 0.3% down and ends only 0.15% down, it has reversed (and vice versa).
Related reading: –Gap types
How Often Do Overnight Gaps Get Reversed? Backtests
We studied three major ETFs: SPY (S&P 500), GLD (Gold), and TLT (20+ Year Treasuries). They represent three very different asset classes.
Here are the results from our backtests from inception until today:
| Ticker | # Gaps (Up or Down) | # Gaps Up | # Gaps Down | Gaps Up Reversed | Gaps Down Reversed |
|---|---|---|---|---|---|
| SPY | 5006 | 2844 (57%) | 2162 (43%) | 999 (35%) | 1133 (52%) |
| GLD | 3720 | 2007 (54%) | 1713 (46%) | 954 (48%) | 835 (49%) |
| TLT | 4038 | 1992 (49%) | 2046 (51%) | 898 (45%) | 972 (48%) |
What Does It Mean?
- SPY tends to gap up more frequently than down, but gap downs are more likely to reverse. 52% of gap downs in SPY were reversed intraday, compared to just 35% of gap ups.
- GLD and TLT show a more balanced picture. Reversal rates hover around 45–49% for both up and down gaps, with no significant bias.
- Across all three ETFs, gap downs are slightly more likely to be reversed than gap ups, especially in SPY.
Conclusion
Overnight gaps are not always a continuation signal. In fact, a significant portion of them—especially gap downs—are reversed by the end of the day.
Traders might find edge in strategies that exploit these reversals, particularly in mean-reverting instruments like SPY.