Apple Shows Classic Gap Fade

Jan 15, 2008: 9:54 AM CST

I love it when trades work out as close to perfect as possible. Apple Inc (AAPL) exhibited a classic 1,2,3 Gap Fade play this morning that allowed for major profits for aggressive traders:

The 1,2,3 Gap Play is as follows:

1.
First trade with a gap is to FADE the gap and play for yesterday’s close. Generally, it’s best to give a few minutes of shake-out and enter when price begins to close the gap. Aggressive traders can enter to fade a gap immediately, but placing stops can be difficult

2.
Gap Fill (first trade exit with profit) and reverse trade to play the initial impulse, which was a down impulse. This is based on the principle “Momentum Precedes Price” in that the initial gap is a large momentum impulse and the ‘fade’ is the retracement. Once the gap is filled, this sets up the classic “Impulse Sell” (or “Impulse Buy”) trade. The target can be the original intraday price low, or often just beyond that. New momentum lows (indicated by the blue oscillator) mean that odds favor that new price lows are yet to come

3.
Impulse Sell exit with profit. The new momentum low reading correctly forecast lower prices, and did so rapidly, so nimble traders were able to take advantage of most of the move. The “3″ signifies the Impulse Sell trade’s exit with profit. No more trades can be made based on the 1,2,3 pattern.

 

 

Gap plays need to be traded aggressively and with confidence, and realize that if the first trade is stopped out, odds switch to favor continued price movement in the original direction of the impulse, and that the price action for the day will be that of a “Trend Day” structure.

Also, realize that gap fades require no indicators at all, other than price itself. Complex indicators can degrade the edge present in this simple strategy.

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154 Expert Traders Right On Your Own Computer Anytime

Jan 14, 2008: 7:29 PM CST

A fellow blogger referred me to the Video Education and Classroom section at INO.com, which contains video and audio lessons complete with workbooks and PDF file lesson hand-outs for over 500 videos available to you On-Demand.

I also recently joined the site, so I will possibly be reviewing some of the videos I watch and giving brief commentary on the site and its services.

From what I can find with my initial look-over, INO TV currently offers fifteen “channels” from the Beginner (channel 1) to advanced trading systems (channel 11) with channels for options traders, currency FOREX traders, futures, stock, and day traders. INO also addresses psychology and money management.

On-Demand content is offered at your convenience 24/7 from a host of popular educators including Lawrence McMillan, Linda Raschke, Mark Douglas (Trading in the Zone) Larry Williams, Adrienne Toghraie, and many others. I haven’t completely looked at the whole list but there are a few educators whom I have met and hold in highest respect and I look forward to watching those videos and refreshing my knowledge and learning new techniques.

Most videos contain an audio MP3 file you can download permanently and listen to on the go with any portable music device (iPod, iPhone, Zune, etc).

The people at INO.com provide two PDF booklet bonuses when you sign up and it’s an extremely affordable service for what you get.

There are two plans, one being a quarterly price of $50, and the other being a full-year membership at $100 total, which saves $100.

Further information is provided via their “What You Get” page.

As an updated disclosure, I have become a commissioned affiliate of Market Club.

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Trend Day Up – Market is a Broken Record in Reverse

Jan 14, 2008: 6:37 PM CST

I wonder when this market will ever gets its head on straight again or regain its footing, whether up or down.

Typically, trend day ups do not follow a trend day down. Often, following any sort of trend day, price consolidates or can even trend a second day in the same direction. Rarely do you have the pattern we just experienced in the US Stock market.

Nevertheless, today was another classic trend day, but in the upwards direction:

Recall that early indicators of a trend day include increased volume, increased range expansion (especially of the first fifteen minute bar in relation to the previous 7 days’ opening 15 minute bar), gap or impulse, high breadth readings, etc.

Today, following a pronounced momentum divergence on the 5-minute charts, we saw a large impulse gap in the US Indexes.

#1 The first “trade” or play is to Fade the Gap and try to short the market to play the reaction against the initial impulse. Usually, the gap (also known as “windows” in Eastern circles) closes at least 50% and more than not, will close 100% (retrace all the way to yesterday’s close).

I always try to fad any Index gap that is less than 100 Dow Points. If I am stopped out, or the trade falters at the 50% retracement, I know that we have a true momentum impulse on hand and the odds then shift majorly that price will continue to trade/trend in the direction of the original gap.

That happened flawlessly today.

When you expect a trend day, put on a core position and buy pullbacks to key moving averages. NEVER FADE A TREND DAY.

I have circled key trades you could have made within the structure of the 20 and 50 period moving averages.

When you detect a trend day early, be courageous and bold and use a bit of leverage if need be. Often, you’ll make the most money for your month if you aggressively trade trend days.

Conversely, you’ll lose perhaps weeks worth of profits if you continuously fade a trend day. Do you see any opportunities to ‘get short’ other than the initial opening gap? There are some, but they’re extremely risky and offer very little reward.

Your timing would need to be virtually perfect and your reflexes intensely sharp, given that this is the 5-minute chart.

Why not trade simply and effortlessly in the direction of the trend? That way, even if you’re initially wrong (price trades against you), the odds still favor higher prices yet to come, and in this case, they do.

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Lengthy Divergence Resolved

Jan 14, 2008: 10:35 AM CST

I always love divergence patterns and their resolution in the market. A full-day divergence on the 5-minute chart from Friday is being resolved today, with the birth of a new intraday uptrend on the 5-minute chart. The market simply cannot make up its mind.

Extended Divergences are patterns where you can almost feel the surrender on behalf of the losing side, as they continue to (in this case) push the market lower on shallower swings. Eventually, the energy will dissolve and the opposing force (buyers) will gain momentum and drive prices higher.

Divergences occur on any time frame, and of course longer time frame divergences are more significant than shorter time frames (such as the one above).

They are very beautiful and simple patterns, and I try to highlight them for you when they occur.

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Pleasure or Pain? Index at Key Zone

Jan 13, 2008: 12:20 PM CST

The NASDAQ index sits exactly at a key price support zone, the break of which will increase the odds for significant downside, but should the index support at this level, can an “all clear” signal be given?

I’m sure you’ve seen prettier charts, but the fact remains that the NASDAQ sits at a key level that bulls have a second chance to defend.

The index is in a confirmed daily downtrend, but this level served as key support in the past in the form of a Key Reversal day on significant volume.

Should the bulls (buyers) fail greatly at this level, it would be difficult to conceive of a scenario where the odds would favor continued price advancements.

Let’s look at the weekly chart to see if we can gain any additional insights:

Actually, the weekly chart looks much more bearish than the daily chart, in terms of the dual trendline break combined with a significant “two close beneath” the 50 period (roughly one year) moving average.

This means that price is beneath the average price gathered over a one-year period, and the 50 period MA has served as key support for any major price corrections.

As you can see from the May/June market correction of 2006, the 50 period average was shattered yet price failed to make significant new lows and then shortly meandered its way back above the 20 and 50 period averages, setting the stage for a new rally.

The same could absolutely happen this time, but as always, we take what signals are given from price, volume, time, and key indicators, and at the moment, it seems the momentum is clearly on the side of the bears (sellers).

In terms of the price/trend structure, weekly price has formed a lower high AND a lower low AND broken support from key moving averages.

I must note that the orientation of the moving averages is still currently “very bullish,” but recall that virtually all indicators lag price and give late signals.

A “Very Bullish” orientation of the moving averages means that the 20 period is above the 50 period, and that both are steadily above the 200 period average.

Gosh, we live in fun times, don’t we?

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