Gaps that do not close within 3-4 hours are a sign of continuation, dollar, gold to remain strong

What happens to all the gaps? Will we see mitigation or continuation? 

*Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content.

The rule of thumb is that when gaps remain open for over 3-4 hours, they are meaningful and continuation is the name of the game. Why? Trading in the first hours of weekly trading is concentrated only in New Zealand and Australia, which are smaller markets. At the same time, it is still Sunday night in Europe and Sunday afternoon in the US. A small number of orders can trigger significant moves in markets, often reflecting panic and uncertainty. 

When Tokyo joins in, volume substantially rises, and some of the moves come undone if investors are unsure about the magnitude of the move. When European traders join the scene, liquidity is already elevated, and more news about the reason that caused the abrupt move in markets. 

However, if the gap persists beyond these initial hours, it implies that there is a good reason for the move and that there is room for continuation. The gap may close later on, but only in response to fresh news that alters the picture. 

In the case of Russia's invasion of Ukraine and the weekend developments 0 Putin's move to raise nuclear readiness, severe Western sanctions on SWIFT, etc. the open gap is a sign of more to come. Investors are set to continue their flight to safety, selling stocks and buying bonds. In turn, gold is set to remain bid as returns on Treasuries are depressed. 

The US dollar will likely remain in high demand – cash is king in times of trouble and the greenback is the king of cash.

What can alter the situation? Russia and Ukraine are holding talks, with Kyiv demanding an instant withdrawal of invading troops and Moscow seeking surrender. All analysts examining these positions foresee a failure to halt the fighting. However, if some sort of ceasefire is agreed upon, the mood would be substantially altered, sending gold and the dollar down.