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.