Market Fades 200 Point Gap

Mar 17, 2008: 9:25 AM CST

As if you weren’t looking for another reason to be amazed by the current market, the weekend developments sent shockwaves through the US Stock Market, causing a 2% gap down Monday morning opening… which has already been erased less than 2 hours later.

Just imagine the fear and panic as the unaware traders turning on their stations this morning. What’s worse is the dread felt by those on Sunday evening, who knew something big was in the air thanks to the surprise Fed cut and Bear Stearns $2 buy-out.

The price shock from those developments was erased initially.

Market action is almost always amazing, in the fact that it slams traders on both sides of the market and defies nearly all expectations.

If you read some of the news sites last night or bloggers’ interpretation of these events, you probably thought the world was about to end. While the market did experience significant overnight weakness which may have caused you to sell in panic this morning, your initial fear was unwarranted. The market may indeed skyrocket lower from here (as the market is currently in a swing-down right off last Friday’s close, and came down to $119.00, beneath the key moving averages), but you felt a pain worse than fear if you sold early this morning – you felt intense regret.

While there is still a lot of price action to play out for the day and week, the initial winner was the one who ‘faded’ the gap and essentially traded against the news. It took extreme courage to do so, either that or you must have been unaware of the news, because buying stock this morning (into the gap) would have forced severe cognitive dissonance!

However, the charts are what they are and the first play whenever there’s an overnight index gap is to fade the gap back to yesterday’s close and then play the impulse (reversal) in the direction of the gap after the market closes the gap.

Despite what you may hear on the news, these trades sometimes produce immense profits quickly for those who are able to fight off their natural impulse to panic and join the crowd.

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