The Most Amazing Gap Fade Ever

Jan 22, 2008: 10:24 AM CST

While I suspected we would get an early morning bounce following the epic 400 point opening gap, I didn’t suspect the gap to fade as rapidly or violently as it did. History was indeed made – in the form of one of the most amazing intraday gap fades ever!

The Federal Reserve surprised the market with an emergency slash of the the Federal Funds rate AND the Discount rate both by .75 basis points down to a rate of 3.5%, with indications that it may do so further at the January 30th meeting if need be.  Economic conditions must be worse than most people expect.

The market loved this news and reacted with a most amazing “gap fade” play.

The DIA (Dow Jones ETF) 1-min chart until 11:00am EST:

Although the gap is not fully faded, the major market index certainly surprised many people and investors are likely breathing a temporary sigh of relief.

S&P 500 5-minute chart:

Here are some examples of pure (true) gap fades that have occurred within the last few hours:

Caterpillar (CAT):

Harley Davidson (HOG):

Sears Holdings (SHLD):

The most amazing gap-fade ever (or that I have ever seen)

I had just read in Mark Douglas’ book Trading in the Zone last night that “every moment in the market is unique” and that “the market can do anything at any time.”

How true those words are. How many people expected a 400+ point overnight drop in the Dow a few days ago?

A lot more people expected it last night. But of those same people, how many truly expected the market to rally by virtually the same amount before three hours trading time had passed, virtually eliminating the major downside plunge completely.

The market (price) can do anything, and we must be fully aware that anything can happen.

Perhaps today will go down as a “key reversal” day, or perhaps it will merely be a bullish illusion. Whatever the outcome, price shocked the longs, shocked the shorts, and then wound up virtually unchanged.

Document this day and remember it for one of the strangest market days in recent history.

12 Comments

12 Responses to “The Most Amazing Gap Fade Ever”

  1. dow jones | New semi news Says:

    […] The Most Amazing Gap Fade Ever […]

  2. A Question « tekel Says:

    […] 22, 2008 by tekel Since when is a 1% drop in the Dow good news? The Dow close today was lower than any close since September 22, 2006. Just because a 128-point […]

  3. Ana Says:

    Corey

    With the emergency measures by the FED, some feel that the FED was reacting to the markets rather than to the economic conditions long term.

    Either way, the action stopped a decline, but for how long, is the question.

    Ana

  4. Corey Rosenbloom Says:

    Ana,

    I’m right there with you. I view the Federal Reserve as there to help the economy and direct economic expansion/contraction and ensure that inflation is in check and employment is as full as possible.

    I don’t think they’re tasked with saving the stock market, or reacting when the market experiences a potentially overdue decline.

    I’m curious what the repercussions will be as well. Did the Fed overstep its boundaries? If so, what might that mean? If this is in line with what the Fed should be doing, what might that mean? Have things changed fundamentally?

    I enjoy being a trader so I can play short, that’s for sure. But the overwhelming majority of market participants are investors through a 401K program, retirement fund, or mutual fund. The Fed appears to be looking out for those folks, but if it supports markets artificially, I’m worried about the long term effects.

    Thank you for the comment.

  5. Stock History Says:

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  7. Today’s Markets | Forex Blog - Forex Trading Daily Updated News Says:

    […] read this post from Afraid to Trade. He notes that today we had one of the most amazing gap fills he has ever seen — a sentiment I […]

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  9. ????? Says:

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