What a month September was for the Market.  It lived up to its reputation as a weak month historically.  So, how did the gap-fade tactic work in the Month of September?  How many overnight gaps occurred in the Dow (DIA) and how many of those filled?  It’s time to take a look as a new month is upon us.

I define an “overnight gap” as an open that is at least 20 cents in the DIA  (20 Dow Points) different than yesterday’s (or Friday’s) close.  A “Fill” is when price ‘gaps’ greater than 20 cents from yesterday’s close and then price equals or exceeds yesterday’s close.  With that, let’s see the numbers:

A staggering and perhaps record 90% of the 21 trading days in September experienced an overnight gap of at least 20 cents.

Of these 19 gaps, 10 gaps ‘filled’ giving us a “Gap Fill” percentage of 52.63%.

Of the 9 “up” gaps, the average gap was $1.44 (144 Dow points roughly).

Of the 10 “down” gaps, the average gap was $1.41.

Roughly the same amount of up and down gaps filled, with a razor thin edge going to the up-gaps filling more than the down gaps (5 of 9 ‘up’ gaps filled while 5 of 10 down gaps filled).

What if the Gap Size was 50 cents (50 Dow Points)?

If we only classify a ‘gap’ as a 50 cent overnight price change (roughly 50 Dow Points), we return the following:

As goes the classic research, the larger the gap size, the lower the odds of a successful ‘fill.’  I find the same stats here.

Raising the gap to a 50 cent threshold finds 76% of days (16 of 21) showing an overnight gap and only 43.75% (7 of 16) gaps filling.

Just for fun (and one time only!) I thought I’d show you the magnitude of gaps that occurred in September.  It may well go down as one of the record months in terms of overnight gaps (focusing on the DIA - the Dow Jones ETF):

A grand total of 1 day (9/9/08) had an exact match from yesterday’s open to the morning open and a second day had a change less than 10 cents.  All other days gapped in some fashion.

We also had a $6.17 upside gap on 9/19/08 and a $3.64 downside gap on 9/15/08.  There was also a $3.18 gap on 9/8/08.

Will October continue the trend?  We’ll see!