CME Gap Analysis: Key Insights For Cryptocurrency Traders

What Is A CME Gap?

A CME gap refers to a price gap on the Bitcoin futures chart traded on the Chicago Mercantile Exchange (CME). These gaps occur because the CME futures market closes on weekends and public holidays, unlike the 24/7 trading environment of cryptocurrency exchanges. As a result, when the market reopens after a closure, the price of Bitcoin might move significantly, creating a gap between the closing price on Friday and the opening price on Monday.

 

Types of CME Gaps

A gap up occurs when the opening price on Monday is higher than the closing price on Friday. Following a gap up, the price can exhibit several movements. The price might continue to rise, indicating strong bullish momentum. Alternatively, the price could fall back to the level of the gap, filling it before potentially resuming its upward trend. In some cases, the price might decline significantly after the gap up, indicating a potential bearish reversal.

A gap down occurs when the opening price on Monday is lower than the closing price on Friday. Following a gap down, the price might continue to fall, indicating strong bearish momentum. The price could also rise back to the level of the gap, filling it before potentially resuming its downward trend. In other scenarios, the price might increase significantly after the gap down, indicating a potential bullish reversal.

 

How big should a CME gap be to be considered 'significant'?

The size of a CME gap that exerts significant influence on the cryptocurrency markets can vary, but generally, larger gaps tend to have a more pronounced effect. A gap's significance depends on several factors:

● Percentage of price movement: A gap that represents a substantial percentage of the asset’s price is more likely to draw attention. For example, a 5% or greater gap in Bitcoin's price is considered significant.

● Market context: The broader market conditions at the time of the gap can influence its impact. During periods of high volatility or major news events, even smaller gaps can be significant.

● Volume and liquidity: The trading volume and liquidity around the gap can also affect its significance. Gaps occurring during high-volume trading sessions are often more impactful.

● Historical patterns: Past behaviour of the asset in relation to similar gaps can provide context. If previous gaps of a certain size have consistently filled and led to significant price movements, similar future gaps will likely be watched closely.

 

Why Should We Pay Attention To The CME Gap?

The CME gap is notable for several reasons that make it a key point of interest for traders and investors in the cryptocurrency market. Here are the main factors that contribute to its significance:

1. Market structure insights

CME gaps provide valuable insights into the structure of the market, particularly regarding the trading behaviour and sentiment of institutional investors. Since CME Bitcoin futures are often used by institutional players, gaps can reflect their activity and market views.

2. Trading opportunities

The tendency of Bitcoin prices to "fill" these gaps presents trading opportunities. Traders can use gap analysis to predict price movements and strategise their trades. For example, if a gap up occurs, traders might anticipate a downward correction to fill the gap and vice versa.

3. Indicator of market volatility

Gaps can indicate periods of high volatility and significant market events. Large gaps often correspond to important news or events that occurred during the market closure, reflecting sudden changes in market sentiment.

4. Technical analysis tool

CME gaps are a useful tool in technical analysis. They help in identifying potential support and resistance levels, as gaps often act as psychological levels in the market. Traders incorporate these gaps into their technical charts to enhance their analysis.

5. Psychological impact

The presence of a gap can influence trader psychology. Knowing that gaps have a historical tendency to fill can create a self-fulfilling prophecy, where traders place bets on the gap filling, which in turn drives the price movement needed to fill the gap.

6. Market efficiency indicator

The filling of gaps can be seen as an indicator of market efficiency. It suggests that the market is correcting any anomalies or inefficiencies that occurred due to the closure of the CME market. This helps in maintaining a more accurate reflection of the asset’s value.

7. Correlation with broader market trends

CME gaps can also correlate with broader market trends and macroeconomic factors. Analysing these gaps in conjunction with other economic indicators can provide a more comprehensive view of the market conditions.

 

How To Check The CME Gap

Use a trading platform

Most advanced trading platforms and charting tools offer the ability to view CME Bitcoin futures charts. Popular platforms include TradingView, CME Group's official website, and other financial data services.

Analyse the CME Bitcoin Futures Chart on TradingView

Step 1: Visit TradingView.

Step 2: In the search bar at the top of the page, type [BTC1!].

Step 3: Choose the appropriate CME Bitcoin futures chart from the search results.

Step 4: Select a suitable time frame to easily spot gaps. Generally, a 1-hour timeframe is better for identifying gaps as it provides a more detailed view of the price movements over the weekend. The 4-hour timeframe can also be useful for broader trends, but the 1-hour timeframe will highlight gaps more clearly.

Step 5: Look for gaps between the closing price on Friday and the opening price on Monday. These gaps will appear as spaces between candlesticks or bars on the chart.

Look for gaps

Gaps are visible on the chart as spaces between bars or candlesticks. To spot them:

● Gap Up: The opening price on Monday is higher than the closing price on Friday.

● Gap Down: The opening price on Monday is lower than the closing price on Friday.

Compare with crypto exchange prices

Compare the CME Bitcoin futures chart with Bitcoin’s price on regular cryptocurrency exchanges over the same period. Significant price movements over weekends or holidays will highlight potential gaps.

Example of gap identification

On Friday (June 14, 2024), the closing price of Bitcoin futures was $65,945. Over the weekend, Bitcoin's price on other exchanges consolidated between $65,900 and $66,700.

Source: TradingView

 

On Monday (June 17, 2024), the CME Bitcoin futures opened at $66,350, which indicates a small but notable bullish sentiment with a gap up of $405 or approximately 0.61%. Given the consolidation range over the weekend, the market's response on Monday aligns with the higher opening price and thus suggests the potential for either a continuation of the upward trend or a retracement to fill the gap. Monitoring subsequent price movements and volume can provide further insights into market behaviour and help in making informed trading decisions.

 

Final Words

Regularly checking CME Bitcoin futures charts and comparing them with Bitcoin prices on other exchanges helps traders identify and analyse CME gaps. This process aids in understanding market movements and making informed trading decisions. The filling of CME gaps suggests market correction and provides a level of predictability and stability that benefits traders and investors in the cryptocurrency market. Mastering the analysis of these gaps equips traders with a valuable tool to navigate the complexities of the cryptocurrency market.

 

 

Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.