Fade the Gap, Make Millions

Jan 25, 2008: 10:41 AM CST

Ok, not really. But seriously, it seems the market is like a cash machine right now for those who employ gap fade tactics. Gap faders have found the hidden switch that turns on market profits simply and effortlessly.

Today was another example of the gap fade tactic across many stocks and especially in the Dow Jones, S&P 500, and the NASDAQ.

Here’s the action as up to the minute as possible:

Let me refresh the gap-fade tactic:

Observe the market has gapped, allow for a few moments of congestion or possible further impulse in the direction of the gap, and when the market begins to break recently established lows, enter with a stop a small distance above the intraday high. Play for a target of yesterday’s close.

Should your stop get taken out and price trended higher, that would be a signal in the opposite direction to trade with the gap rather than against it.

However, the first trade is always to fade the gap. Recall that gaps of larger price impulses (such as 100 points on the Dow or 4% in individual stocks) have lower odds of filling, but they still have a chance to do so (as we’ve seen these last few days).

A reversal trade can often be made when the gap is fully filled as you play in the direction of the gap.

Here is the SPY (S&P 500 ETF) on the one-minute chart for clarity:

Notice there was a slight bounce as price filled the gap at yesterday’s close, but the bounce was only good to the declining 20 and 50 period moving averages.

So far, Microsoft (MSFT) has fallen 20 cents shy of filling its overnight gap as mentioned in the previous post. Not even high-flying stocks that beat earnings seem immune to wicked gap fade tactics:

(UPDATE: 12:45 EST. MSFT actually did go on to fill its gap after I posted this chart, with a current intraday low of $33.16)

Also, remember that not all gap fades play out as expected, so there’s no reason to bet your entire account (or even a large portion of it) on the expectation that it will.

Risk control and proper position sizing are required, even on a seemingly high probability setup.

Feel free to reference my earlier post in November on “How to Play Opening Gaps in the Indexes” or do a search on this blog for “gap fade” and view any number of posts and see why this tactic is among my most favorite and most profitable tactic I employ in my intraday trading.

Do be careful out there, whichever direction you choose to play.

7 Comments

7 Responses to “Fade the Gap, Make Millions”

  1. Stock Market » Fade the Gap, Make Millions Says:

    […] Here’s another interesting post I read today by Corey Rosenbloom […]

  2. Jeff Says:

    Fascinating post. The trick, of course, is to know which gaps to fade and which not to, before you get stopped out…

  3. Blog » Blog Archive » Fade the Gap, Make Millions Says:

    […] Cornell Finch wrote an interesting post today on Fade the Gap, Make MillionsHere’s a quick excerpt…my earlier post in November on “How to Play Opening Gaps in the Indexes” or do a search on this blog for “gap fade” and view any… […]

  4. Jeff Says:

    will do. thanks a lot!

  5. Veridle » Blog Archive » Re: Fade the Gap Says:

    […] Source: Fade the Gap […]

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