# Open-Gap Rule and The Death Zone

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.

Open-Gap Rule

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:

1. 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.
2. 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.
3. 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.
4. 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%.
5. 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.

Death Zone

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.

1. 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).
2. Confirmation that the Death Zone is in play takes place when the market accepts below 33% (Value Area Low).
3. Once (2) occurs expect the ‘B’ will give way.
4. 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.

FIGURE 1 Death Zone

## 6 thoughts on “Open-Gap Rule and The Death Zone”

1. baz says:

Thanks Ray, With names like Death Zone and Ray Wave,were you a fan of Star Trek? Best wishes cheers Baz

2. ray says:

Hi Baz

I have been sprung! I am a treckie at heart.

3. ray says:

Peter sent in this question:

Hi Ray,

For the open gap point 4, not sure if I understand correctly.
Shouldn’t the 2 consecutive 15min bars close Above the 50% mark instead of below?
Thanks.

Regards,
Peter.

4. ray says:

Hi Peter

1) The 4 point gap is derived from the standard deviation of a 10-day ATR. It’s 5% of that number.

2) yes you are right = close ABOVE 50%. Thanks for catching the error.

5. Manohar Shimoga says:

Respected Sir,

1 I am from India . I just recd the link via
yr email to me.I just read it cursorily and left for the market. To my Surprise tne Indian
Index ‘NIFTY” opened with a GAP UP.

2 It did exactly follow the rules outlined by
you. Nifty made a SPIKE DOWN.This can be seen
intra-day on http://www.nseindia.com.I presume that I
have understood you correctly.
With kind regards

6. ray says:

Hi Manohar

Thanks for taking time to drop me a post.

Great! The open-gap worked for you on the Nifty. Good to know.