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The Gap composite is a market breadth indicator that measures and compares the number of stocks that gapped up and those that gapped down. This market indicator calculates, for each trading bar, the average of the gap difference formula of all stocks in the universe. The Gap difference formula consists of subtracting "GapUp" (function returns 1 if there is a gap up, 0 otherwise) to "GapDown".
Interpretation:
0: If the gap composite value is equal to zero then this means that bullish and bearish stocks are of equal strength. The number of stocks gapping up is exactly the same as the number of stocks gapping down.
Higher than 0: The number of stocks gapping up is higher than the number of stocks gapping down. A value of 10% tells us that there are 10% more stocks that had a gap up that those that had a gap down.
Lower than 0: The number of stocks experiencing a gap down is higher than the number of stocks experiencing a gap up.
100: A gap up occurred in all stocks during the current day.
-100: A gap down occurred in all stocks during the current day. It is very unlikely that an extreme value occurs.
The Gap market breadth indicator should be used in addition with a smoothing technical indicator such as the simple moving average.
A divergence between the gap composite and a market index such as the S&P 500 or NASDAQ is usually an indication that a market reversal is imminent. Prepare your stops and be ready to close your positions if such divergence occurs.
