Thursday, January 15, 2009

My Gap Indicator

Click on Chart to Enlarge

Today's chart is related to a recent post I made showing the ratio of the last 5 days cumulative gap percentage divided by the sum of the absoltue values of those gaps. That indicator ranged from -1 to +1 and was a way to help identify short-term exhasution points by excessive gapping in one direction over a period of one week.

The chart above takes that same data and multiplies it by a ratio of the average absolute gap size the last 5 days to the average absolute gap size for the last 21 days. The idea behind looking at the data this way is that this indicator will take the relative size of the recent gaps into consideration as well. So this chart will tend to oscillate between -1 and +1 but has no theoretical limit either up or down. The times to pay attention are when the indicator exceeds the -1 or +1 level.

As of yesterday, the indicator was -1.04 which is a relatively extreme reading. On a conceptual level, this shows that the gapping for the last 5 days has been largely to the downside, AND the gaps have relatively large compared to the gaps over the last month.

So what would I conclude from this data? From the past data I have looked at, it would indicate that the market is near a short-term bottom and may make a violent snap back rally soon. It DOES NOT indicate any major bottom. The highest or lowest readings in this indicator will tend to come at volatility breakouts, which is bearish in general. The indicator may be useful though for short-term traders to show short-term exhaustion points.


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