BarroMetrics Views: Open-Gap Rule and The Death Zone
I received a barrage of mail asking that I explain the two topics. Before I get into that, a comment: for some reason, I seem to invite e-mails rather than comments. Folks I would be grateful for comments, questions or requests at the blog rather than e-mails. Thanks for helping out.
I use the open-gap rule for the ES (S&P e-mini futures) and 30-Year Bonds. It works for Gold if you use the combined day and night sessions.
The ‘rule’ says that if the instrument has an open-gap by at least1/2 the standard deviation of a 10-day Average True Range then:
- If greater than 50% of the open-gap fills in the first 60-minutes of trading, then we expect the whole of the open-gap to fill.
- If the gap has not filled within the first 60-min but is trading in extreme quadrant in the direction of the 50% of the open-gap, allow another 30 minutes for 50% of the open-gap to fill.
- For example: in the ES there is an open-gap down and ES has not filled 50% of the gap in the 1st 60 minutes. However when the 60-min bar closes, the ES is trading in the bottom quadrant, I will extend the time to fill the open-gap by another 30 minutes.
- By ‘fill’, I mean ‘accept’. This is an important distinction. If the market moves beyond the 50% and forms a rejection extreme on a 15- minute bar, this is not ‘acceptance’. The easiest form of acceptance is to have 2-consecutive closes (15-min bar) below the 50%.
- All things being equal, if 50% of the open-gap does not fill in the first 60-minutes, we can expect a trend day in the direction of the gap.
In a congestion market, the death zone is the area that stops the market from reaching its Primary Zone. This is a clue that the congestion market may be coming to an end. Let me use Figure 1 to illustrate. Let’s assume that the market is coming from D.
- If the market is coming from the Primary Buy Zone, the Death Zone is the 66.67% (Value Area High) to 50% retracement area. Reverse if coming from the Primary Sell Zone (see Figure 1).
- Confirmation that the Death Zone is in play takes place when the market accepts below 33% (Value Area Low).
- Once (2) occurs expect the ‘B’ will give way.
- The Death Zone is less robust when you have a Negative Development breach at D i.e. if at D we see B breached but D remains above the Maximum Extension.
I use the Death Zone when I expect a wave-5 Failure i.e. in an uptrend when I expect wave-5 to fail to make a new high (see yesterday’s blog on the Ray Wave). I also use it as a warning benchmark – to caution that the sideways condition has ended.