Amazing Gap Fade

Sep 14, 2007: 10:04 AM CST

The Dow Jones ETF – the Diamonds (DIA) – and broad market completed an amazing “Fade the Gap” trade with few if any ‘hiccups’ along the way.

It’s worth viewing for further study and reference:

The gap close target also corresponded with the daily pivot point, providing an excellent target.

What happens afterwards is beyond the scope of the original trade, but usually the first play – following a gap – is to play to fade the gap.

The second play usually is to play in the direction of the original gap to try and capture a piece of the original momentum action.

Both trades should have relatively close stops, but not so close as to be tagged on normal volatility.

The same play occurred simultaneously on the S&P 500 ETF (SPY), but with a bit clearer “Target Tag”.

Odds favor initial gaps to close, especially on the major indexes, unless the gap occurs greater than 1% on the index (or 3% to 4% on a stock).

It’s an easy play that requires little thought or indicators, except price alone. Of course, other indicators can provide confirmation/non-confirmation, but I recommend using them sparingly with this initial play.

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