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SPY opening gaps

Tuesday, October 25, 2016 6:24
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There are quite some people in the blogsphere claiming that gap trading is statistically profitable. Just google for ‘opening gaps’ or something similar to get a bunch of links. Some claims are quite interesting stating >70%  chance of  a gap closing after a ‘gap up’. Well, I imagine that it is possible to have a 70% ‘closed gap’ statistics and still have zero edge in trading the gap. I have looked into this topic about a year ago and first results were promising.
This time I took a look at the matter in a slightly different way: looking for correlation between overnight change of the SPY (previousClose-to-open) and the daily change (open-to-close) of the following trading session.
Below is a chart of cumulative daily percentage changes  of SPY for about 3 years of data. Blue line is the overnight change and green line the day session change. It is immediately clear that day session is more volatile then night session. . Apart from that nothing really special in this  chart.


More insight comes from plotting the overnight return vs daily return :


Judging by eye, there is no relation between nightly change and the daily session. Testing for correlation between the two gives : 0.000062 … yes, zero.  I’m not sure while my previous attempts at building a gap strategy produced positive results, but now I’m determined to get to the bottom of this…


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