Let’s Talk About Gaps…
I’m extremely happy to
announce that I’ll be doing this column every trading day.
On Thursday, the
September S&P futures (SPU and ESU)
opened with a 7.5 point gap to the downside, right at Wednesday’s low and just
above S1 support. The market gapped despite the Bureau of Economic Research
reporting that the recession had ended in November ’01 (I must have really been
in a perpetual haze to not notice the recession was over all this time!). The
size of the gap gave roughly an 85% chance of filling at least part of it (see
more on opening gaps below). Morgan Stanley was a good seller of a couple
hundred SPU contracts right off the open. Locals bid the price up off the lows
and Merrill Lynch was a buyer up to 990.50. After the contract stalled at 991, a
big sell program took the market back down to S1 support at 987, and then broke
to a new low at 985.25. Merrill Lynch sold the market down to the overnight
Globex low of 983.25.Â
The market drifted sideways until the noontime
release of the Philly Fed report, which came in at 8.3, above the 7.0
consensus. The September futures did a knee-jerk up off the news, before the
brokers lined up and sold the market back down to new lows. Volume took off for
lunch and didn’t come back until the last hour. Merrill Lynch and Goldman Sachs
sellers shook the trees and broke the contract to a another new session low,
until a short-covering bounce into the close ahead of
Microsoft’s
(
MSFT |
Quote |
Chart |
News |
PowerRating) earnings report managed to temper a little
bit of the damage.
The September S&P 500 futures closed the session
with a loss of -14.25, and in the low end of its range. On a daily basis, the
contract has continued to decline off bearish Stochastics divergence, and also
broke its 20-day MA at 989 and last week’s low at 982. The next areas of major
support to watch are the 50-day MA at 972 and the 7/1 low at 960.50 (see chart).
On Friday morning at 9:45 am ET, we
have the release of the Preliminary Michigan Sentiment report with a consensus
of 91.0, from last month’s 89.7. Friday is also options expiration and probably
a good day to get an early start on the weekend!
Gaps
There’s an old trader’s adage that says “all gaps
get filled.” This is a very simple expression. However, it’s also simply not
true. But first, here are some general statistics on gaps. A gap between 0 and
1% will have an 85% chance of retracing at least halfway, and a 78% chance of
retracing 90 to 100%. Gaps between 1 and 2% are not quite as reliable when it
comes to retracement. 78% of them will retrace at least halfway, while just 60%
will retrace 90 to 100%. So, it’s important to know the size of the gap. It’s
also important to know the circumstances surrounding a gap’s formation.Â
Today, we’ll discuss Common or “Pattern” gaps,
which usually occur with general market news that creates short-term hype around
the open. An example would be an economic report such as the monthly
Unemployment Rate or the Retail Sales report. If you look at a 3-min or 5-min
chart, and look to the left of the gap, you will see price history (see
charts). This type of gap can be a good “fade” candidate based on its size,
meaning we’d look to trade contrary to the direction of the gap. I encourage
you to always remember your safety net, “When in doubt, just stay out.” Unless
you can closely monitor your trade, gaps carry the greatest margin for
error. So, don’t just identify a gap and jump in!
Daily Pivots
for 7-18-03
| Symbol | Pivot | Â Â Â Â Â R1 | R2 | R3 | S1 | S2 | S3 |
| COMP | 1707.03 | 1720.58 | 1743.15 | 1756.70 | 1684.46 | 1670.91 | 1648.34 |
| INDU | 9060.74 | 9103.65 | 9156.47 | 9199.38 | 9007.92 | 8965.01 | 8912.19 |
| NDX | 1261.78 | 1273.98 | 1292.01 | 1304.21 | 1243.75 | 1231.55 | 1213.52 |
| SPX | 984.78 | 990.95 | 1000.18 | 1006.35 | 975.55 | 969.38 | 960.15 |
| ESU | 983.83 | 990.92 | 1001.08 | 1008.17 | 973.67 | 966.58 | 956.42 |
| SPU | 982.93 | 989.07 | 997.33 | 1003.47 | 974.67 | 968.53 | 960.27 |
| NDU | 1262.00 | 1275.00 | 1295.00 | 1308.00 | 1242.00 | 1229.00 | 1209.00 |
| NQU | 1266.00 | 1282.50 | 1310.00 | 1326.50 | 1238.50 | 1222.00 | 1194.50 |
| BKX | 885.00 | 889.86 | 897.61 | 902.47 | 877.25 | 872.39 | 864.64 |
| SOX | 385.35 | 390.81 | 398.73 | 404.19 | 377.43 | 371.97 | 364.05 |
| QQQ | 31.35 | 31.67 | 32.15 | 32.47 | 30.87 | 30.55 | 30.07 |
| SPY | 98.85 | 99.53 | 100.57 | 101.25 | 97.81 | 97.13 | 96.09 |
Good luck with your trading on Friday!
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