Another Day, Another Gap Fade

Apr 8, 2008: 10:03 AM CST

While some people may hate overnight gaps, others love them for their simplicity and potential profitability. Today, almost like clock-work, the US Stock Market opened with a down-gap and filled it by Noon EST.

Keep in mind that yesterday’s trading opened with a gap-up that was filled also.

Here is today’s Gap-Fade trade, with two potential entries and two potential exits (depending on your level of risk aversion):

The gap-down was approximately 60 Dow Points ($0.60 DIA points) and had some initial play to the downside. I like to wait about 10 to 15 minutes to see what the reaction will be just to guard my risk a little bit and make sure some of the excess is shaken out.

You could have entered at any point, but the safest entry probably came at the second “enter” arrow, which represented a pullback in price to the Daily S1 Pivot level. I placed a stop beneath the intraday low with a target of yesterday’s close (just under $126).

Price then trended higher as expected, and found initial resistance just shy of the target, which would have allowed a conservative exit (meaning not playing for the full target) but aggressive traders who stomached the pullback reaped a larger reward when the target was achieved and exceeded.

The typical play now is to play the market back down in the direction of the original impulse. After all, gaps do occur for a reason and they are inherently a momentum impulse.

The Gap-Fade trade is one of the simplest trades you can take, but it can be one of your most profitable trade set-ups, depending on your strategy.

3 Comments

3 Responses to “Another Day, Another Gap Fade”

  1. Tom Says:

    Corey,
    Your site is excellent for Straightforward TA. I really like the gap fade trades. What is the “Daily S1 Pivot level” and how do you figure that out?

  2. Stock Market » Another Day, Another Gap Fade Says:

    […] Afraid to Trade.com Blog wrote an interesting post today on Another Day, Another Gap FadeHere’s a quick excerpt While some people may hate overnight gaps, others love them for their simplicity and potential profitability. Today, almost like clock-work, the US Stock Market opened with a down-gap and filled it by Noon EST. Keep in mind that yesterday’s trading opened with a gap-up that was filled also. Here is today’s Gap-Fade trade, with two potential entries and two potential exits (depending on your level of risk aversion): The gap-down was approximately 60 Dow Points ($0.60 DIA points) and had […]

  3. Corey Rosenbloom Says:

    Tom,

    Thank you for the comment!

    The S1 Pivot is derived from the daily chart, and are also known as the “Floor Trader Pivots.” There are many locations to find more information, and even websites with pivot calculators for you.

    Check out this article from Investopedia:

    http://www.investopedia.com/articles/technical/04/041404.asp

    For me, TradeStation calculates and applies the day’s pivots automatically for me (generally I show StockCharts.com charts rather than TradeStation charts).