Opening Gaps in SPY/S&P 500, part 3, Anatomy of Fading Gaps

Last Updated on November 21, 2020 by Oddmund Groette

I decided to look more into opening gaps in SPY (S&P 500). After all, a lot of traders claim to make good money on this strategy, at least according to my search on the web. For me, this is unknown territory as up until this date I have only been daytrading stocks, and my experience in trading indices is close to zero.

My database in this sample is from January 2005 until October 2012. I’m using EOD data on SPY downloaded from Yahoo!Finance. This means I only check the SPY’s Open, High, Low and Close for the day. There is no intraday data. I suspect the results are a good deal better than to expect in live trading, keep that in mind.

In my first post about opening gaps, I faded (going against the gap) gaps under 0.6%. In my findings below I’m fading every gap between 0.1% to 0.6% (and vise versa). Target is 75% of the gap size from the close.

Day of week

Mondays:

Total in % #fills #wins Avg
12.05 200 160 0.060

Tuesdays:

Total in % #fills #wins Avg
11.76 231 182 0.051

Wednesdays:

Total in % #fills #wins Avg
22.68 239 202 0.095

Thursdays:

Total in % #fills #wins Avg
18.94 213 181 0.089

Fridays:

Total in % #fills #wins Avg
17.99 210 172 0.086

The equity curve looks the best on Fridays, a lot steadier on that day. The later in the week, the better. I don’t know why. But it opens opportunities to trade other twists earlier in the week.

Period of month

Day 1 to (and including) 10:

Total in % #fills #wins Avg
22.05 349 277 0.063

Day 11 to 20:

Total in % #fills #wins Avg
27.11 366 303 0.074

Day 21 to 31:

Total in % #fills #wins Avg
34.27 378 317 0.091

Worth noting is that the 1st day of the month is horrible. The last two days of the month are very good.

Gaps inside yesterday’s bar

When SPY either opens below yesterday’s high or above yesterday’s low:

Total in % #fills #wins Avg
43.56 734 610 0.059

Gaps outside yesterday’s bar

When SPY opens above yesterday’s high or below yesterday’s low:

Total in % #fills #wins Avg
39.88 359 287 0.111

The equity curve looks a lot better for gaps outside yesterday’s bar than those gaps inside. The average is also a lot better.

Gaps outside 3 days range

Gap up must open higher than the high of the previous 3 days and vice versa for longs.

Total in % #fills #wins Avg % long % short #fills long #fills short
24.14 197 158 0.123 6.65 17.50 56 141

This equity curve looks really nice! These days we can even trade gaps up until 0.75% with very good results.

Yesterday unfilled gap down

If yesterday gapped down (when high of yesterday is lower than low two days ago):

Total in % #fills #wins Avg % long % short #fills long #fills short
5.21 33 30 0.158 3.21 2.00 12 21

Very good results, but not surprisingly it’s long which is best. All longs hit the target. A good example of reverting to the mean.

Yesterday unfilled gap up

Total in % #fills #wins Avg % long % short #fills long #fills short
8.97 66 58 0.136 6.48 2.49 34 32

If it’s a gap up the day before, both directions are good. In general, if unfilled gap yesterday, the better chances to fade the gap.

Gaps after a high range day

What happens if yesterday had a higher range (HIGH-LOW) than the 15 days average?

Total in % #fills #wins Avg % long % short #fills long #fills short
34.30 439 363 0.078 19.57 14.73 168 271

Gaps after a low range day

Total in % #fills #wins Avg % long % short #fills long #fills short
48.86 640 527 0.076 18.52 30.34 297 343

Gaps when yesterdays close was above 10 day moving average

Total in % #fills #wins Avg % long % short #fills long #fills short
56.94 682 561 0.083 23.85 33.09 326 356

Gaps when yesterdays close was lower than 10 day moving average

Total in % #fills #wins Avg % long % short #fills long #fills short
26.32 404 332 0.065 14.24 12.08 141 263

Gaps when yesterdays close was at least 2% above 10 day moving average

Total in % #fills #wins Avg % long % short #fills long #fills short
11.23 94 84 0.120 6.87 4.36 59 35

Gaps when yesterdays close was at least 2% below 10 day moving average

Total in % #fills #wins Avg % long % short #fills long #fills short
15.89 86 82 0.185 9.14 6.75 34 52

Gaps when the close is above 0.5 in yesterday’s range

Here I’m using the formula (CLOSE-LOW)/(HIGH-LOW) to decide yesterday’s range:

Total in % #fills #wins Avg % long % short #fills long #fills short
34.98 612 485 0.057 12.90 22.08 280 332

Gaps when the close is below 0.5 in today’s range

Total in % #fills #wins Avg % long % short #fills long #fills short
47.98 479 410 0.100 25.06 22.92 189 290

Gaps when the close is above 0.75 in yesterday’s range

Total in % #fills #wins Avg % long % short #fills long #fills short
27.67 359 299 0.077 11.21 16.47 167 192

Gaps when the close is below 0.25 in today’s range

Total in % #fills #wins Avg % long % short #fills long #fills short
32.76 264 229 0.124 14.77 17.99 98 166

Why is gaps much better when yesterday’s close is lower than 0.25? Both long and short are better with a nice and steady upward sloping equity curve.

Gaps when yesterday’s open is lower than yesterday’s close

Total in % #fills #wins Avg % long % short #fills long #fills short
39.44 556 451 0.071 17.55 21.89 261 295

Gaps when yesterday’s open is higher than yesterday’s close

Total in % #fills #wins Avg % long % short #fills long #fills short
43.71 528 439 0.083 19.57 24.14 203 325

Yesterday gapped down and closed below 0.33 on the daily range

Total in % #fills #wins Avg % long % short #fills long #fills short
10.30 160 134 0.064 4.39 5.91 62 98

Yesterday gapped up and closed above 0.66 on the daily range

Total in % #fills #wins Avg % long % short #fills long #fills short
17.20 262 217 0.066 11.01 6.19 132 130

Gaps on the day of the monthly jobs report

This is the most important macroeconomic news in the month and might be worth considering. It’s on the first Friday of the month. Friday is the best gap day of the week. Here is the result on those days:

Total in % #fills #wins Avg % long % short #fills long #fills short
3.40 44 36 0.077 2.20 1.20 13 31

The win rate is pretty good, but the average is below other Fridays. So this is perhaps worth mentioning.