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.

2009-12-09-blog-death-zone.jpg
FIGURE 1 Death Zone

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

  1. 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.

  2. 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.

  3. 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

Leave a Reply

Your email address will not be published. Required fields are marked *