Opening and Closing Gaps: Why They Matter Most

They say the smart money is in the market two times during the trading day: at the beginning and at the end. For the most part, that is very much true. Day traders, big investors, and hedge funds like to get an early start in the morning, and they become active at the end of the day when they go to close positions before the next day.

These two periods of the day attract the most interest and volume, and they are subsequently the most important part of each trading session. The chart patterns, information releases, and gaps that occur, too, should also be viewed as important.

Opening Gaps

The opening gaps happen as a result of what occurs between 5:30 PM EST and 8:30 AM EST. As a result, opening gaps are frequent, since in the world of international finance and 24 hour news cycles, much can happen overnight. There are four types of opening gaps, including: full gap up, full gap down, partial gap up, and partial gap down.

Of all the opening gap patterns, the full gap up and the full gap down are the most important. A full gap up is completed when the opening price is higher than the last session high. Thus, if the S&P500 were to open at 1300 after closing at 1295 the previous day, there would be a full gap up of 5 points. Likewise, a gap down to 1290 from 1295 would be a full gap down of 5 points.

Partial gaps happen when the gap breaks neither the high nor low, but opens at a price other than the final closing price. Partial opening gaps are extremely common, and they are not usually interpreted to be of any importance.

Opening gaps tend to act as support and resistance lines for the rest of the daily market action. Opening gaps on a chart that extends past intraday trading are also equally difficult to bust, as traders see them as an area where there is plenty of buying or selling interest.

Closing Gaps

Closing gaps happen at the end of a session, as intra-day traders look to close positions ahead of market close. Exiting at the end of the day allows traders to limit overnight exposure, harvest profits, and avoid paying margin interest, which is typically assessed at market close.

Closing gaps are important because they show the degree to which institutional buyers are moving in or out of specific stocks, bonds, or indexes. Should a stock gap from $25.50 to $25.70 at the end of the market, a large investor has either reversed a short position by buying to cover or increased their net longs into the next day.

Closing gaps happen for reasons other than opening gaps. When gaps happen while the market is open, it almost always signifies large speculative interest. A stock that has a closing gap from $60.00 to $59.90 shows that a large position was sold, or that a net short trader moved to market neutral. The $.10 between $60.00 and $59.90 indicates that the order size was large enough to move the market, as the market maker adjusted the price downward to attract enough buyers for the exiting investor.

Whether opening gaps or closing gaps, each gap provides some critical insight into how money is moving in or out of the market, and what prices will be most technically important in future trading. While there may not be enough information to make trades solely based on gap information, when used in tandem with other indicators, support and resistance lines, or other tools, gaps can be powerful confirmations of trades.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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