What Is The Sermon on the Mount?

Part of an occasional series of articles about the sermon on the mount (Matthew chapters 5–7). I have the privilege of being part of a group of men who are studying this passage. I am also drawing on…

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Inefficient Market Gap Theory

Hi fam, it’s your friendly meth chemist here!

This article is about an idea that I developed in the previous months, just by observing an odd and interesting phenomenon on many altcoin charts (regardless of whether they are USD or sat pairs).

It’s a theory based on empirical evidence, so take it for what it is. But let’s get started!

In classic legacy markets a “gap” is created by the open of a daily candle that is higher or lower than the previous close, leaving a hole in the chart. This is due to the fact that they usually close for trading at the end of the day or over the weekend. After this break, circumstances and market sentiment have often changed enough that trading will resume at a totally different price level than before.

In cryptocurrency markets, where trading is open 24/7, gaps are not quite the same. For the purposes of this Inefficient Gap theory, we will define them in the following way.

A classic bullish R/S flip, important level gets tested and provides solid ground for further advance. Efficient market and price action

Basically a gap is a missed S/R flip of an important resistance or support level. Price doesn’t retest the previous level to flip it, but just continues straight up/down.

Still a bullish chart, but levels are not retested and made support, price is exuberant and goes parabolic, making a lot of “gaps” between previous R levels and swing lows. Inefficient market

Markets usually tend to manifest these S/R flips when price action is not very exuberant, thus making them efficient. On the other hand, when markets are very irrationally bullish or bearish, they tend to run hard leaving a lot of untraded/untested areas.

Let’s study some past occurrences of S/R flips and gaps. Here are some examples that I have observed in the past months.

Price broke upwards though the 0.01 level in a violent way and formed a swing low at 0.011, leaving the “FUD gap” open.

The gap was filled with the retest of the missed 0.01 level.

2. RVN/USD

In mid March price broke the $0.037 resistance level without retesting it. A swing low was formed in mid May at $0.042 but left an inefficient gap behind.

The gap got filled in mid July, with a violent bounce up from the untested level.

3. ETH/USD

ETH broke the $180 resistance level without retesting it immediately. The lowest swing low was $240.

Then in July we had a violent dump that almost filled that gap completely.

4. GRIN/BTC

A gap formed in June between 30k (broken level) and 36k (lowest swing low), which was later completely filled in July.

5. BTC/USD

The infamous 6k level was broken in December with a fast selloff, leaving some important inefficient gaps behind.

In April the first gap was completely filled, and the second little one got filled at the retest of 6k in early May.

Spotting an IG is very easy. You need a significant level on the daily chart to be broken and not retested, as well as a swing low/high that leaves a gap between the aforementioned level. Now you have your gap.

These IG can be both bearish or bullish, and it can take several weeks/months before they get filled eventually.

Not every gap has to be filled, but the majority of the altcoins that I observed got filled. I don’t yet have an answer for this phenomenon, it is just an observational empirical high probability play.

How can I use this as an edge in my trading? Let’s use an example like LTC/BTC.

Say you were already long on LTC since .0085 and you saw the gap forming with the 0.011 swing low.

First sign of weakness was the bearish engulfing candle at 0.017

This implies that the market is very inefficient and exuberant, so you should ride it more and be more greedy since the buy pressure is so strong that it leaves untested levels. Also this indicates that you should take profits at the first sign of weakness, since exuberant price action is often followed by a steep correction.

Now imagine you missed the move. You were on the sidelines, but you wanted to long LTC because you liked the fundamentals. You could have spotted the gap, and waited for a long while. But patience paid off, and you would have had your long entry at the untested level.

You would have gotten a 25% bounce, not bad for some blind bids!

Price can either continue in the direction of the gap (LTC or BTC for example), or it can just revert back in the opposite direction.

There is no strict rule for this, the only thing that is sure is that these IG act like “price magnets”, they tend to attract the price action to fill them and make the market efficient again.

**BTC/USD 2014–2016** : hard to find any gap, levels getting flipped like pancakes, very efficient market.

**BTC/USD 2018–2019**: looks different, the most notable gap is the 4.2k one.

To be continued…

What Is The Sermon on the Mount?

Inefficient Market Gap Theory

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