On Nov. 5, CME Bitcoin Futures flash crashed from $9,400 to $8,360 in mere seconds only to recover to $9,200 just as fast. The entire event lasted less than 10 minutes and appears to be a prime example of ‘filling the gap.’
Essentially, CME Bitcoin Futures do not trade 24/7, and on Friday afternoon the market closes for trading and re-opens on Sunday afternoon. If the market re-opens on Sunday at a price that is significantly different from the closing price on Friday, a gap is created. This gap can be particularly pronounced on the last Friday of every month, when the expiration occurs, an event that can cause significant market movements as discussed in a recent CryptoIQ article.
Following the expiration, on Oct. 25, a large gap was created with the price jumping from $7,700 to $8,700 when the market re-opened on October 27. The flash crash on Nov. 5 dived into this gap, although it did not fill it completely.
It is important to understand why filling the gap occurs in general in order to explain the price action on Nov. 5. Gaps can be caused by irrational exuberance or pessimism, resulting in the price suddenly jumping from the close to the open. This sudden price movement across the gap leaves no technical support or resistance.
For example, Bitcoin (BTC) suddenly jumped across the gap after the October expiration, and perhaps something pessimistic happened in the market on Nov. 5. So when the price of CME Bitcoin Futures began to fall there was no support level, and the price dived into the gap. Essentially, after a sudden price movement upwards across a gap, the support level lies somewhere within the gap.
It is also important to know the terminology for the type of gaps. A breakaway gap occurs at the end of a price trend, and the price jumps or falls across the gap, signaling a new bullish or bearish trend. An exhaustion gap occurs at the end of a price trend and is basically one last attempt to hit a new high or low before a new price trend begins. Continuation gaps occur in the middle of a price trend, and common gaps are those that fit none of the other categories.
Apparently exhaustion gaps are the most likely to be filled, but the event on Nov. 5 involved filling a breakaway gap showed that any gap has the potential to be filled.
Another example of CME Bitcoin futures gaps quickly being filled happened near the end of March 2018, when the price declined from $7,400 to $6,900 across the gap and then jumped back to $7,400 a few days later, filling the gap. Near the end of April 2018, another gap-filling event occurred, with the price rising from $8,600 to $8,900 across the gap and then returning to $8,600 within a few days.
Aside from gaps being filled within a few days or a week, other analysts think that gaps can be filled weeks or months later. For example, this analysis shows how a gap from the middle of June was filled near the end of September, and other gaps that were filled weeks after they happened.
So it seems the best way to use CME Bitcoin futures gaps in a trading strategy is to mark down the details of a gap whenever a gap happens and keep in mind that this gap could be a future support or resistance level. Ultimately, it seems the usefulness of gaps is that they give hints on where a support or resistance level is present. This is especially true if the movement across a gap is generated by irrational exuberance/pessimism, then the price before the gap indicates the rational price of Bitcoin (BTC).