Gap Openings

In the event of a gap up opening where the futures gap above fair value and stocks open higher than the prior day’s close, the rule to remember is that the 5- and 15-period moving averages need to catch up. Shorting gaps up is naturally countertrend. This sets up opportunities to place shorts off existing pivots or 200-period moving average resistances at least until the 5-period moving average catches up. Gap openings should be considered to be like short squeezes, so it’s important to make sure that the 1-minute stochastic gives 80-band crosses down or mini inverse pip slips through the 80 band before taking shorts. The Achilles heel of a short squeeze is an 80-band stochastic slip on either the 1-minute or the 3-minute chart.

The first 15 minutes of the opening should be traded only by experienced traders, since this period is fast and frenetic. The 13- and 60-minute noodles reading should be done after 9:45 a.m. If you take a position overnight to play the gap down or up and it gaps against you, it is important to make sure that you give it 10 to 15 minutes after the open and mark the highs and lows of that opening period. If the high in that period breaks, then keep a stop. If the low breaks, then manage to pare and lip the gapper.

In the event of a gap down opening where the futures gap below fair value and stocks open lower than the prior day’s close, the same rule concerning the 5- and 15-period moving averages needing to catch down to the gaps applies. This means that the countertrend move to go long off a pivot or 200-period moving average support can be played. The upside on the bounce is the 5-period resistance overshoots for the scalps. Getting a good stochastic 20-band crossover on both your 1-minute stochastic and the futures 1- and 3- minute stochastic is the key to assuring a clearer move.

Next Level Trading