This is an interesting analysis by Rob Hanna who has studied and quantified the gap activity Phil mentioned in his double week review. He came to a similar conclusion – very odd market behavior. – Ilene
Thoughts On Recent Gap Activity
Courtesy of Rob Hanna at Quantifiable Edges
I then look at comparing the size of the average gap to the size of the average intraday range (not the true range as shown above). Here again I found we are at very high levels but past history was choppy and inconclusive.
Lastly I looked at times where the 10-day average gap was well above normal and the 10-day average intraday range was well below normal. Again I could find nothing suggesting a significant directional edge.
So is this activity suggestive of anything? Perhaps. While the readings themselves don’t seem to help greatly in predicting direction, they do indicate some unusual behavior. My take is that the market is being influenced more by outside forces than is customary. It’s been noted by many that the dollar has been leading everything by the nose lately. Outside influences like Dubai debt have also had an overnight influence lately. This would seem to explain why such a large percentage of action is occurring overnight.
So what should we do about it as traders? Two things come to mind – 1) Be more cognizant of dollar and other intramarket action. 2) Perhaps don’t put quite as much weight on standard price, volume and breadth indicators as usual. The studies have done quite well as of late. Still, it may be worth trading with a bit more caution than usual until the stock market manages to decouple from the dollar a little bit.