Talking about correlations, lately a whole lot of people seem to note an inversely correlated reaction in the stock market as oil fluctuates.

But I don't think it's that simple. Oil goes up, markets go down. Yes, on some days. But these correlations have not presented them in the past (think of last year when markets were going steadily up, and oil as well).

Imho, it's important to be aware that any such correlations of unrelated markets may be nothing other than a temporary situation with other fundamental meaning.

This is not the case comparing the ES and the YM for example, which are and continue to be, correlated to a certain extent. I don't remember where I read the stats, but I'm pretty sure it was 80% or more.

very interesting stuff GJ, look forward to anymore you add.

Great analysis of your trading Firewalker. I think changing to the thirds is a great idea as it will give you more flexibility and encourage you to hold on for your profit targets. That post you referenced from Db is great.

Don't get me wrong, I agree

Thanks for the great reply Firewalker. I too find myself thinking the big players will want a retracement to get in.

What I found in my analysis was that the gap had no bearing on which direction the market continued. Now hypothetically, if the big guys wanted to lower the market to get in after we had a gap up and others were trying to exploit this at the same time, there would be some strong selling going on. Someone could exploit this by buying all the sellers but they may need deep pockets and a strong belief the market is going to rise once closing the gap. However, the direction of the gap didn't give any clues as to the direction of the morning market.

You make an excellent point about the volatility changing over time. It is why I don't think this could be traded in a vacuum. The circumstances of the gap would still need to be taken into consideration as well as support and resistance levels. 8 points was something a mentor pointed out. I decided to check it on my statistics and came up that the market was more likely to close the gap when it was under 8 points. Now I could have made it 9 points and got the same results, heck I could have done 10 points and got the same results.

For me personally it is more a matter of judging a big gap rather than a medium to small sized gap. Again it needs to be done in relation to the rest of the market and where support and resistance zones lie.

I have not let your comments divert me from the goal. I actually like people questioning the methods because it either helps me see a reason why it wouldn't work or helps solidify why it could work. I do appreciate your input immensely and always like getting alternative views. Thanks for your great support and help.

I have decided to start a thread on this here

I agree Firewalker. I would be looking for some consolidation before a strong buy up occurred. I'm not on any side with my bias right now, to me it also appears as though we are in decision mode. Will be interesting to see what happens over the next few weeks.

keeps you on your toes and keeps you humble

They are similar-ish!

Don't forget though that as an indicator, what you see know is NOT what you saw then and this changing indication is enough to forget them already.

My trendlines are always going to produce better clues as they are based on price and when they change, they change based on S/R, not a movement in a mathematical equation, which doesn't incorporate S/R amongst so many other things.

All IMO of course!

If price breaks mid candle, I wait. As I am in 24/5, I have to limit myself and give myself a break somehow so yes, I only trade on the hour.

Analysis paralysis - no-one's immune mate.

You make some good points about aftermarket (or premarket) action. If a break of S/R happens overnight, I often find myself thinking "big players will want a retracement because they still need to get in" and this frequently happens.

Anyway, I think some of these things you're saying might work well for a short period of time, but in the end they can't. If, hypothetically speaking, you had an 80% chance that any gap of x number of points got closed on day A or day B, than a lot of people would soon notice this and exploit this inefficiency. And by doing so, they would erase the possibility of profiting from it...

I hope you don't let my comments divert you from your goal. If you want to study these things, by all means do so. The problem I see with using "8 points" is that the ES - like any other market - goes through periods of volatility expansion and contraction. Those 8 points might be valid today, but not any more next month or next week, if you know what I mean...

Finally, one other reason why I suggested you open a thread is that you'll perhaps find out that others have studied the same thing. I'm sure some people at some point in their trading career looked at gaps and how they played out... But like I said, it's up to you to decide what you want to do

I think the gathering long positions for a sustained advance, needs some sort of accumulation base forming. Indeed, there's often buying from big traders going on around selling climaxes and so, but price rarely reverses a trend without having some time of consolidation first.

You make some very good points there FW. I agree 100% that there is a big difference between then and now. Quite right about February being seen as a correction at the time and it did end up taking a few months after that to feel the force of the credit crisis debacle.

Something I do question is, does a big move down like that after we have seen an extensive decline represent a possible squeezing out of the last few short positions for big traders to gather long positions? Or does it represent a continuation of further declines to come?

Thanks for bringing up some great points Firewalker. I haven't set anything in stone just yet but will try to answer the points a best I can.

(a) I was more so looking to get down my research on screen than look for a reaction or comments. In no way does that mean I don't want them or appreciate them as I love the input from people like yourself. It helps me look at things from a different angle. I might consider making it a thread for possible discussion on the use of gaps though I'm not sure.

(b) I have thought about the news aspect and took a look at the gaps that were closed. Most on the Wednesday and Thursday seemed to close under the 30 minute time period. Days where the news is announced between 9.30am and 10am will have to be avoided to remove unnecessary risk.

(c & d) I was attempting to make this as simple and basic as possible. I'm not one to trade purely based on past statistics as I have done that previously and it's just not my style. I probably didn't explain the aim behind this research or how I would trade it as well as I could have. Possibly me being a bit lazy after writing so much about the statistics.

I was really looking for something to provide me with an edge at the open. It would appear gaps on Wednesday-Friday have a tendency to close when the gap is smaller than 8 points. A past mentor told me that exact thing and I have traded that a bit in the past but never understood why it occurred so didn't trust it.

Now the fact that I have this information doesn't mean I will place a trade at the open for every gap under 8 points Wednesday-Friday. It's not the way I like to operate. What it does mean is that Wednesday to Friday I will be looking for a gap under 8 points to fail to keep going in the direction the gap was made.

If we hit some predetermined s/r levels it will be even better. Otherwise I will rely on my trading analysis to tell me if it's likely to happen or not. Another great advantage I have is that if we move in the direction of the gap more than 1.75 points initially, my analysis tells me the edge is decreased.

Thanks for directing me towards the gap descriptions. I have never looked into the different types of gaps extensively. I will now look at the different types we have and also assess those. Also looking at whether the gap broke important s/r levels will also be handy in assessing the likely hood of the gap making a decent move.

I also didn't find any correlation between the direction of the gap and the morning trend which I found quite interesting. These gap moves aren't really big trending moves to capitalize on, they generally are a few point scalps as we close the gap. I'm guessing we might often gap above support level for example and then move back to the support to test the area. Then we continue up if the level is strong. That is all theory and not tested though.

(e) I tend to think that technically there is no gap but realistically there is. A couple reasons why I believe this is:

The big players only trade the market hours. The liquidity is not sufficient enough during the after market hours for the big guys to move their 1000 lot positions. I'd imagine many of them would also refrain from leaving their stops overnight as they don't want to be pulled from their position by a couple of crazy kids swinging the market around with 50 lots.

The stocks are only open during market hours. Since the S&P is based internally on the stocks that make up the S&P, outside of those hours is much more speculative.

Although the ES keeps moving, I actually don't think the people that matter trade after hours. If the market has been moving up the day before and we gap down at the open, you can bet there are a few big traders wanting that market to get back to the level they bought at the end of the day to get break even or cover their positions.

Thanks for the great comments Firewalker. They certainly make me think even harder about my analysis.

Thanks Tess, and my apologies for the late reply. I've been traveling and didn't notice your kind comment until just today.

My system actually had a down series last month -- it was very slightly negative over a period of irregular trading, which may have skewed the results. (I'll be updating my blog soon with the details.) I'm still comfortably positive overall, and am trading the system in a new series (with better results) and monitoring the statistics carefully.

Good thinking about comparing this to February 2007... but I think there's a big difference between then and now. At that time we still had a 'reasonably healthy' uptrend, and the move lower was seen as a correction. While now, the major trend is down imo, so I'd imagine the magnitude of the move to be quite different than last year...

Hi jason, several comments:

(a) I think this topic is worth initiating a new thread for. That is, if you are looking for some comments or reactions on this.

(b) Don't forget to take into account the news that often is released 30 minutes after the open.

(c) Traditionally there are four types of gaps: common, breakaway, continuation and exhaustion gaps. See also here: http://stockcharts.com/school/doku.p...ool:glossary_g

(d) What might be more significant in trading gaps, is to determine whether or not the gap means a break of important S/R. This might help in determining the probabilities of a move in the same or opposite direction.

(e) In futures because of the overnight trading there is technically no gap as everything is pretty continuous and markets can be traded 20 hours out of 24...

you'll have to make them proprietary wasp, your lines = your style Making the bodies count gets your line 'closer' to price, but it'll also show price breaking the line on occasions where it would no do so, had you drawn your line otherwise. So what do you do when you have a one hour bar that's breaking your trendline but closes below it again. Don't tell me you wait for one hour

Thanks... they look similar, like I thought. But by the way you are draw your lines, Parabolic SAR will by definition lag a bit behind.

Interesting nonetheless, as what you're doing is very similar to the people who use these dots in their strategy. As the indicator says: SAR...

Will do at some point as I will have to download parabolics as I strip everything from my metatrader except the essentials (ie, templates, indicators, EA's)....