Your Quick Hack to Trading the Gap
Have you ever looked a chart on your favorite stock and noticed a space between yesterday’s closing price and the next day’s open price? These spaces in the charts are called gaps. They happen frequently and if you know what you are doing, you can make some easy money.
That’s why I put together this quick “hack” to trading the gap.
First, some background…
The conventional stock market hours in the United States are from 9:30 a.m. to 4 p.m. EST. Truth is, the machines are always on somewhere and adjustments in prices have been made since the official close of business the previous day.
But when trading was done in the old brick and motor exchanges, the trading day would truly end when the market closed. When trading would resume the next day, the price of the stock or commodity would start where it left off the day before. Technology now allows us to access the global financial markets anytime and anywhere. Therefore, trading is a whole new animal.
Futures markets are constantly in motion and the ability to trade a stock in the pre-market, post-market or even on a foreign exchange has created the opportunity for immediate reaction to any news event.
The price gap, or the difference from the close to open, can say a lot about market mentality. As you can imagine, a gap up or down of more than half a percent in the major stock indexes is not uncommon thanks in part to the 24-hour news cycle.
Here are three things can happen following a gap:
1) Price Extension – Momentum continues in the direction of the higher or lower open. Market participants with less leverage chase the runaway train.
2) GAP Backtrack – Price gaps are often filled… eventually. The first sixty minutes (sometimes called amateur hour) often sees emotional buying and selling that the market needs to sort out.
3) Sideways Malaise – A go-nowhere market that offers little opportunity, because most of the move happened on the gap up or down at the open.
Here’s how you can trade a gap:
It is crucial to watch the first hour of trading to see if the gap is filled or holds. Buy the gap up with a stop loss at the previous close to capture extension or sell into the gap strength with a stop above the day’s peak.
Of course, you don’t have to try trading any gaps with real money tomorrow morning. Use a practice account first and wait until you find some consistency with your performance before putting real money on the line.
Keep it In the Money,
Chart of the Day: Is the rotation already canceled?
Over the past few weeks, we’ve discussed at length the possibility of a major stock market rotation.
After all, one of the main critiques of the post-crash rally has been a lack of broad participation from anything residing outside of the tech sector. We started to see some of that elusive rotation we’ve waited for to kick off August trading. For example, the Dow Jones Industrial Average outpaced the Nasdaq Composite and S&P 500 last week, leading many to believe that a bigger “catch-up” move was percolating as the red-hot tech trade started to cool…
But these rotations can be elusive.
This week has already started off on a different note. The Nasdaq Composite is quickly springing back to life, jumping to a gain of nearly 1.6% for the week as of Tuesday afternoon. Meanwhile, the formerly resurgent Dow remains stuck in the red.
The mega-cap household names are also perking up, adding fuel to the Nasdaq’s fire:
Follow more than a month of constructive consolidation, Amazon.com (NASDAQ:AMZN) broke out Tuesday afternoon following a strong move of more than 3.5%.
The jury is still out. But right now, it looks as if the rotation everyone was waiting for was simply a pause in the strong tech uptrend that will ultimately resolve to the upside.
— Greg Guenthner