Gaps and Momentum Bursts

The last two days in the major market ETFs have shown gap opportunities, though the gaps have (yet) to close on both occasions. Also, interesting momentum impulses have developed which warrant an educational lesson. Let’s see:

DIA (Dow Jones ETF) 5-minute chart:

First, notice the purple ovals, which represent overnight gaps. While January was a month when 70% of gaps filled, February is looking to be just the opposite. I’ll run the numbers at the end of the month, but it wouldn’t surprise me one bit if 70% of gaps in February did NOT fill. It’s one of those instances where the market character changes, and strategies with edge (that become known to the masses) erode as everyone catches on to the ‘easy money.’

While the current action (as of 11:00am EST) could be headed for a fill, time will tell if this is the actual case.

Second, I wanted to highlight the three momentum ‘bursts’ or impulses which resulted in a reversal into the close yesterday. It formed an interesting pattern worth further study.

Notice the first impulse burst resulted from the overnight gap and major (temporary) demand imbalance. You can almost feel the imbalance (momentum) wane as price reached a peak and then reversed for a counter-swing against the momentum.

Imagine a ball being thrown into the air as you are traveling down the road in a car. If you plotted the trajectory of the ball as it was thrown, it would look similar to yesterday’s action. This sort of analogy helps explain a large portion of price swings and counter-swings in the market.

As the ball reaches the peak, it first slows down before stopping and then traveling back to earth. Each time it was caught at a higher level and then thrown with a bit less force until the ball eventually came back to earth as the child lost strength and ‘dropped the ball.’

We see another toss of the ball upwards this morning, but we’re currently experiencing a ‘sell swing,’ which is analogous to the ball coming back to earth. At what level will it be caught and thrown back up?

Rather than overcomplicate your chart with excessive indicators, why not look at the pure price action and study the swing nature itself of the price, and envision the waves of supply and demand (of buyers and sellers) as they exert influence over prices in a rhythmic manner. Now, see if you can identify normal and natural trading opportunities within this structure.