Gaps

[diliff]

Hey guys. A while ago I asked the question of if and why there are greater gaps in the Australian indexes than the US, and I was told by Trembling Hand, no less, that it wasn't true and was simply a myth and he suggested I do backtesting to prove it. I didn't and don't have the ability to backtest thoroughly so I left the issue as it stood at the time. Original thread is here:

https://www.aussiestockforums.com/forums/showthread.php?t=11297

Well, the thing is, I couldn't see the logic then and I still can't see the logic now. Every time I look at the last 5 days of trading on Google Finance, I see what is CLEARLY much greater gaps in the All Ords when compared to the Dow (or any of the other US indexes for that matter). Not only are there greater gaps, but there is also far less daily movement. Here is the last 5 days trading of the All Ords and Dow side by side:

As I originally said this would make it much harder to day trade since, at least in the example above, half to 3/4 of the daily movements occur OVERNIGHT. My observation was that we tended to follow the lead of the US and Europe and the US but were scared to make any movements one way or the other until we saw what move they made next and hence the gaps when our markets open after their trading day.

Rather than just tell me how wrong I am again, it would be good to have a proper discussion about my observations and the chart I posted as an example.

 

[sails]

Maybe this is what TH meant? Below is a dynamic data from Bourse showing the same time frame in your chart - have separated the days with the grey lines to make it easier. I think the appearance of no or little gap in this chart is most likely due to the 10 minute staggered opening on the ASX and this first 10 minute move is really not tradeable as each individual stock opens with a gap. It is frustrating when our OZ stocks gap heavily and then go sideways through the day. Sometimes those gaps can be good to fade, but need good money management and a cool head as the gap openings on individual stocks can be fairly volatile. The gap on the 4th was good for a buy once it settled down - but wouldn't have worked the 6th...

I would imagine the only way to trade it is through SPI futures which trade through the night. But then, if you gotta sit up all night and trade something as illiquid as the night SPI, would be smarter to simply trade the US indicies.

 

[skyQuake]

Hey sails, your chart isnt dynamic open; diliff's chart is dynamic open. Those are the real index gap plays.

Note that SPI gap plays are very different, most of the gaps are those from transition from night session to the day session open at 9:50am. Entirely different ball game.

Personally, I would think fading gaps on the index as difficult at best, and counterproductive at worst. Few people look at gaps in dynamic charts, they would rather look at gaps (if any) in the SPI. Gaps in the index are caused by gaps in the constituents. For example a gap in BHP may be closed, while the major banks flounder around, leaving the index's gap unfilled but BHP's gap closed.

Cheers

 

[sails]

Hi Skyquake - obviously a difference in the interpretation of "dynamic"

But the difference between the two charts clearly shows a gap on diliff's chart and much less on mine (albeit untradeable, IMO). It may be because one is a line chart (only showing the closing price at the end of whatever timeframe and the other (mine) is a candle chart.

I'm not sure what TH was referring to when he said there are no gaps on the index - just thought by showing the 5 min candle chart which shows the opening candles on the index for the first 10 minutes might explain what he meant.

Maybe when TH returns he can explain...

 

[skyQuake]

Hey sails, I define dynamic index chart as one that avoids the staggered open by taking the opening prices of each stock as the actual open. So no big red or green bars sailing up or down.
Thanks to the staggered open and data vendors; open = y'days close by definition. Thus there are no gaps on the index if u look at a traditional chart.