Gap Confusion
Yesterday
was a decent day in terms of trend and volatility. The afternoon offered a quick rally which we scalped for a few dimes. The
morning offered a good push to the downside, which was not quite volatile enough
for quality HVT, but was sufficient for position trades. When I say position trades, I mean holding for a slightly longer time
frame, say a half-hour to several hours. The
market as of late has been difficult to scalp. So to take advantage of the
100-point swings in the Dow, you need to position yourself in trades that will
put 50 cents to a dollar in your pocket with slightly larger stops. Most of the money I’ve made in the last month has been from position
trades off quality chart setups, not scalping the NYSE for dimes.
Most of the position trades we come up with can be found in
our nightly
service. For each trade we provide
an entry, a stop, and a target on a nightly basis. We have had decent success with these trades as we have received a good
response from our subscribers. Some problems and confusion have arisen about trade entry after a gap up
or down. Say we put a sell short
signal on a stock and it gaps down 50 cents below our intended trade entry, did
we miss the trade, should we pay up to get in? Gap openings have occurred frequently as of late and thrown traders some
curve balls. A good majority
of the time they will fade (close) the gap. When the stock opens, you see it is already 50 cents away from your
intended entry. “I better jump in before I miss anymore downside action!â€
This then leads to traders “paying up,†or down in this case, only to be
stopped while they fade the gap. From
this point is where the market rolls over and your intended trade plays out
before your very eyes. How many
times has this happened to you? So
to clear up some of the confusion, I’m going to walk you through one of our
position trades from yesterday focusing on trade management.
The biotechs have pulled back after a strong move down, and we’re
looking for a low-risk entry on the short side. Scanning charts on Sun, I saw a good pullback/bear flag forming on the 15-minute
Biogen
(
BGEN |
Quote |
Chart |
News |
PowerRating) chart, I know I want to be short on the break of that lower uptrend
line.
The S&Ps gapped down around 8 points, with BGEN gapping down a
quarter, then trading down another quarter. The natural instinct is to jump on
board as to not let any more potential profit slip away. What happens next?
BGEN reverses quickly to trade up 50 cents in the
next 10 minutes. Now the last thing
I want right off the open is to have a trade go 50 cents against me, so chances
are we were stopped out. Was this
preventable? Absolutely. Now we know that lately when the market gaps they fade it,
right? Of
course we do. So why not let the
trade come back to us and we’ll get a better entry price. The way I traded BGEN this morning was to draw Fibonacci grids on the
one-minute and sell into resistance.
The
first price I went short this morning was at the 38% retracement at the 30.90 area. Now when I position trade, and especially when I position trade
Nasdaq, I
break my entry into different areas. It
works like clockwork to have a position trade immediately go at least a little
bit against you. So why not take half of your intended trade size now, and plan
on putting the rest of the trade on at a better
price? I refer to this as trading
in zones.
Part two of the plan was to sell my other half at around
the 50%
retracement (zone II), or 30.95. Now
this is the cool part of this strategy, your stop is clearly defined. Any break of
the 62% retracement constitutes a pullback/pattern failure and
you are stopped out of the trade for, at most, a 20-cent loss. A break of 62% according to Fibonacci definitions is the area where
natural buyers come in and price should test recent highs or a 100% retracement.
We have another reason to
believe that 62% should serve as final resistance; the bottom trend line from
the previous 15-minute chart above is serving as resistance. The key to remember here
is what was once support becomes resistance. BGEN bounced off this level all day on Friday, gapped and traded through,
only to rally up to it from below, thus becoming resistance. From here the trade was smooth sailing, netting almost $1.50. I closed out the trade for the morning and went short again into
resistance at the 38% retracement on the day at lunchtime, but only ended up with
half size because I was anticipating a test of the 50% retracement.
I know this is more technical than you are used to, but don’t stress. It’s not something that you are supposed to get all at once. It’ll come with enough “screen time†time staring at your charts.
On an Uncle Al sort of note, remember
that FOMC meetings have become very tricky to trade. They used to be like shooting fish in a barrel, but
that just isn’t the
case anymore. Don’t
get caught with your pants down on the first or second move.
Much like position trading above, wait for the move to come to you,
don’t chase. Take care and good
luck. Let’s have a good week.
Todd Gordon
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 865 | 882 |
| 856 | *871.25* |
| 850 | 863.50 |
| 844 | 855-53 |
| *840-42* | *845* |
| 834 | 834 |
| 823 | 815.50 |
| 815 | |
| 812 |