Gaps: the structural ones and the rest

Open a daily cash index chart and gaps are everywhere. On a traded instrument that would be remarkable. Here it is the normal state, and treating every one as significant is the fastest way to misread the series.

Why most of them mean nothing

The cash index is not calculated overnight, so any repricing at all shows up as a gap. That is one sentence of mechanism from module 1 and all this lesson needs of it.

The consequence for reading is that gap size is not evidence of anything by itself. A quiet night in which the future drifted produces a gap. So does a night in which nothing whatever happened but the previous close was struck at an auction slightly away from the last continuous price.

The test that actually separates them

Look at the future's overnight chart. It traded through the hours the cash index skipped, so it has the path the cash chart is missing.

• Cash opens inside the overnight range: nothing new. The gap is the cash series catching up to prices that already existed.
• Cash opens outside the overnight range: something happened at or near the open itself, usually in the auction.
• The future gapped too: whatever it was, it happened while both were closed - a genuinely discontinuous event.

Most gaps fall in the first category, which is why the honest reading of most of them is "the market moved overnight and the chart could not show it".

What a gap costs

The reading matters because a gap is where a stop stops being a price. Here is the arithmetic, and it is the same conversion module 1 lesson 8 taught.

Reading gaps as levels

A gap leaves an unvisited range on the chart, and traders draw on it - the gap's edges become levels because they are the last prices before and the first prices after.

Be clear about what that is. Those edges are real prices at which real auctions and trades happened. The space between them is not a level, a target or a magnet; it is an absence of data. Whether price returns through it is module 5's question, and the honest answer to "do gaps get filled" is that it depends on what you count and over what period.