Smooth Gap Fill this Morning

Apr 3, 2008: 9:28 AM CST

The US Indexes opened this morning slightly lower via an overnight gap, yet as of 11:00 EST, all had virtually filled this gap, creating a profit opportunity for nimble traders.

Let’s look at two different chart views to see the difference: reports yesterday’s close as a hash-mark around $126.20 (in the DIA) but it appears that the market filled the gap based on the way the service reports the data.

Nevertheless, the first play when there is an overnight gap of less than 100 Dow Points is to play to fade the gap back to yesterday’s closing price. How you play the trade is up to your method, but I generally give the market 10 to 15 minutes to shake-out overnight excess and to wait for a little confirmation before entering (looking for initial price movement into the gap direction). I typically place a stop ½ the distance to my target (if my target is 80 points away, my stop is 40 points ($0.80 and $0.40). Experience will allow you to develop your own strategy.

Today’s gap did not fill completely (yet), but the resistance (and price failure) via the 50 period moving average was enough for me to exit due to the two ‘long upper shadows’ on the candle bars was enough for me to exit.

The S&P 500 and the NASDAQ actually completely filled their gap this morning.


Now, let’s view the Dow Jones’ (DIA) data via TradeStation:

TradeStation and other vendors show data a little differently, in terms of where you ‘cut off’ the price action for the day. Although the day closes officially at 4:00 EST, some vendors show you the post-market chart which can skew your prices a bit.

Nevertheless, here is the pure price action and the gap fill trade zoomed in on the chart. Notice that the 200 and 50 period moving average (on the 5-minute chart) provided initial support and resistance, which also could have served as decision support for your trade idea.

Gap fade trades are popular and well-known strategies that try to take advantage of order flow and price movement that goes counter to most newer traders’ expectations.

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