Here’s A Valuable Lesson On How To Trade Gap Openings
Lesson Of The Day: Don’t Get Caught Up In Euphoric
Openings
I hate it when I have a whole bunch of buy setups and the
market has a “gap” up type opening. Why? Often these euphoric openings
are the result of nervous shorts covering and eager longs throwing caution to
the wind. Once these traders buy, there’s often no one left. The market then
begins to sell off. In other words, euphoric openings can often be the high for
the day. So how should you play them? Sit on your hands and let them play their
game. Then, after the opening range is established, look to enter if and only
if!, the stock (and ideally the market and sector too!) can trade above this
opening range.Â
 Notice above how
the Nasdaq “found its high” just moments after opening.Â
On Thursday, as mentioned above, the Nasdaq opened near its
high and then generally sold off for the remainder of the day. This action keeps
it below the 2100 resistance level. It remains above its 50-day moving
average.Â
The S&P put in a similar performance. This action
keeps it below overhead resistance which also corresponds with roughly the .786
retracement level of its last leg down. So far, it too still remains above its
50-day moving average.Â
^next^
So what do we do? As mentioned last night,
markets can resolve an
overbought condition in both time and/or price. Therefore, by staying flat to
slightly lower and above the 50-day moving average, the indices (so far) are
“walking off” their overbought condition. In the sectors,
overall the action remains positive. On the other hand (I know, give me a
one-handed trader/analyst), there were a few sectors such as retail that were
hit pretty hard on Thursday. Also, some others such as biotech seem to be
stalling shy of their old highs. Speaking of old highs, I still remain concerned
about the aforementioned overhead resistance in the indices. Overall though, I
suppose you can continue to nibble on the buy side but only if you see intra-day
strength (and not just on the open as discussed above).Â
As far as setups, Mattson Technology
(
MTSN |
Quote |
Chart |
News |
PowerRating), mentioned
Wednesday night, still looks like it has the potential to continue
higher out of a Bow Tie/First Thrust type setup (and bigger picture cup and
handle–not shown).
MGM Mirage
(
MGM |
Quote |
Chart |
News |
PowerRating), in gaming and also mentioned last
night, still looks like it has the
potential to continue higher out of its first pullback since breaking out of a
high-level base.Â
Best of luck with your trading on Monday!
Enjoy your market holiday! (how’s that for being
politically correct?!?)*
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. My new 20-hour course is now shipping.
Click here for details.
*I almost made the mistake of saying “good luck hiding the eggs so you
won’t go to hell.” Whew, imagine the hate mail if I would have wrote that!
Â