Taking a look at the way the markets have been behaving lately, we see a higher than normal instance of price gaps. Gaps occur when today's low is higher than yesterday's high or when today's high is lower than yesterday's lows. Since we are seeing more gaps, I thought it would be interesting to know just how many more than normal?
To find out, brought up TC2000 and added the gapper's indicator which is shown on the chart to the left when applied to symbol EFA which is the iShares MCSI EAFE Emerging Markets Index fund. I picked this one since it seems to have a higher degree of price gaps The primary gaps indicator appears above and spikes back and forth between 0 and a max of about 1.92 due to a squashing function. I then overlaid a 20-period moving average and came up with the Gapdicator - or Gap Indicator.
For the EFA, the indicator is nearly 0.5 which is quite high. For the S&P 500 EFT SPY, its closer to 0.3. For most typical stocks with little price gapping, its much lower. Here's a quick summary:
EFA - Emerging Market's ETF - 0.48 - Relatively high but historical high as high as 60
AAPL - Apple Computer - 0.25 - Moderately high but lower than historical high at .45
SPY - S&P 500 ETF - 0.3 - Elevated and sustaining highs
Most stocks - 10-15 - With occasional moves up to 20
What does this mean for our trading?
- Day traders miss out on the full extent of the gain because they don't harvest the gap on the long side
- Market is thin due to summer vacations etc. Its also worth pointing out that volume on the stock exchanges is reaching record lows. Other than the high frequency traders, most of the public is hiding out in Mutual Funds, ETF's or bonds. As a result it seems to be either risk-on, or risk-off depending on the latest news from the Euro Zone.
- Results are terrible for Forex for breakout systems which is getting whipsawed back and forth. Its so bad, I haven't even looked at the results for the week, i'll update it later.
As a result, I have become sort of disengaged from the Stock and Forex markets lately. Also, I'm coming to crunch time on several projects with my regular job which are keeping me hopping. So I haven't had much time for extracurricular development lately.
But its worth pointing out that stocks seem to have lifted the lid on the recent range and broken out to the upside. And the S&P daily chart is moving in a channel and to the upper right at about 37 degree angle.
Whatever stocks are doing, its also worth pointing out that the 2% yield in the S&P 500 exceeds the 10-year treasury by 40 basis points. In the end, dividends are what make stocks the place to be regardless of what the charts are doing.
Also keep in mind that the central banks can produce an almost unlimited amount of money - as long as inflation does not become a problem. The European bankers don't seem quite as willing to create money as Bernanke and the Americans. But when push comes to shove, they will do whatever it takes to keep the Euro, and the entire modern money economy from falling apart.
That realization, plus a dose of potential optimism that Romney might win, are enough to keep a bid under stocks. Have a great week.
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