BUYING MORNING GAP DOWNS
For years, it terrified me to place a buy order into a big down gap (the advantage in NASDAQ is knowing where price will open before the bell). One day, it just stopped scaring me and got a whole lot easier.
The turning point was being trapped on the other side. I once tried to sell a big DELL position thinking it was 3:01pm. I had lost an hour somewhere and it was really 4:01pm. I never had a position that big overnight before. Sure enough, the next morning DELL was set to open 3 points below my entry. I sold into it, just happy to be relieved of the pain. The stocks went straight up from there all day, well past my original entry point.
I won't forget the pain in my stomach watching the spread drop that morning before open. I forgot all my rational knowledge of the numbers and market sentiment and acted on instinct. Wrong.
Understanding that mentality is one reason buying into morning gaps sometimes makes for complete no-brainer winners. Some gap downs are very low risk when you have confidence and understand your market: the prior moves and swings on the stock (the TA numbers), overall sentiment and reading between the lines of the news for the decline.
Inexperienced traders are better off avoiding these types of entries but many of us who have been around for awhile have seen the same crap over and over again. Many morning games are redundant. Market makers and insiders are not particularly original in their strategies. In other words, they'll tell the same lies as often as they can get away with them.
Insiders who missed yesterday's tech move did all they could this morning to knock down the opening so they could get on board cheap. CPQ was pure no news. I couldn't believe anyone was trying to make a big deal out of it. The stock is near a multiyear low. And INTC gets clobbered by one analyst reducing estimates. If you've followed the the semi breakout the last week, you know it's for real. Those of us who have watched semis through past cycles know how powerful they can be in leading the market up and down. So some dingleberry adjusting numbers won't kill the breakout by a long shot.
Technically, you can't often play a gap down for a home run. The trade sets up because the up trend that preceded it was very strong and you're relying on others to support this larger bull trend. But the gap itself is a countertrend (bear) move in the next shorter time frame and this often creates a dangerous "hole in the wall" or island reversal" pattern on the intraday chart. So the point is to take your gain and get the hell out.
INTC today was a low risk gap down trade. I entered a limit order for 57 1/4 two minutes before opening and sold at 58 1/8 about 1/2 hour later. If you knew INTC, you knew 57 was a very important number: the breakout point for yesterday's rally, the top of the breakout gap, the 50 day moving average and 100% retracement of the last rally "wave". About as clean as they come and the sentiment was so clear.
The insiders knew that many people weren't convinced yesterday's rally was real so they played on their fears. The best trades come when the majority are leaning the wrong way.
Alan |
