Does Fading the Gap Work in APPL?

Can you be profitable using the simple “Fade the Gap” strategy in Apple Inc (AAPL)? Let’s find out.

To recap, a gap is defined as an overnight price move greater than $0.25, in which case the trade is to ‘fade’ the gap and trade against it and exit when price reaches yesterday’s close. The stats I provide record open to close, and whether or not the price of a given gap was filled intraday at any point or not. The strategy is for intraday trading only.

Let’s see!

From January 1st, 2000 to Friday, June 14th, 2008, here are the results:

Does fading a $0.25 gap work percentage wise?

Answer = Yes

Of the 2,055 trading days, 1,002 days showed some sort of gap (580 up and 422 down).

Of these 1,002 gap days, 592 gaps filled, (340 up and 252 down) for a total of 59.08% of all gaps filled.

It actually would have been MORE profitable to fade upside gaps, despite the strong upward rise in the stock.

Next, let’s look at a $0.50 gap.

Does fading a $1.00 gap work percentage wise?

Answer = No

Over the last 8 years, there were 293 gaps greater than $1.00 (175 up and 118 down).

46.42% of these gaps filled (n= 136) ; (79 up and 57 down).

What if we considered the last three years only?

Apple (AAPL) rose from a 2006 low of $50 to a 2007 high of $200. What if we looked only at that quadrupling in price, plus the trading days into 2008 (current)?

Since 2006, of the 608 trading days, 473 have resulted in an overnight gap greater than $0.25.

Of these 473 gaps, 310 have filled, meaning 65.54% of the gaps filled (196 of the 310 up gaps filled and 114 of the 163 down gaps filled).

What about gaps greater than $1.00 over the last three years?

Of the 185 gaps greater than $1.00, 94 gaps filled, for a percentage of 50.81% of all gaps filled (58 of 122 up gaps filled while 36 of 63 down gaps filled).

You can see that as the size of the gap increases, the percentage of gaps filled decreases, which has been shown by other studies.

Fading a gap in Apple (AAPL) that is $0.25 or less can be a profitable strategy from the percentages themselves, but one would need to test stop-loss strategies to ensure true profitability.