Speak of the Devil - Here's an Example
Friday, November 7, 2008 at 3:22PMIn the prior post I discussed the historical results of a tip from March Chaikin; namely the increased gap fading risk (i.e. significant reduction in gap fade win rate) when a security closes above the 600 period moving average on a 5 minute chart (equivalent to the 50 MA on a 60 minute chart) and then opens below it the next day (and vice versa).
Yesterday, we had such an event as the E-Mini S&P 500 opened beneath the 600 SMA after closing just above it the day before. Check out the chart (the 600 SMA is the purple line; prior close = blue; low of prior day = red; opening gap price = white)
Also of note: this gap followed a "down" day and gaps that open below the low of a prior down day are notoriously bearish, though many will make partial gap fills (in this case it managed to test the 600 SMA and fill the gap half way) before rolling over and finishing down by more than 5% for the 2nd day in a row.
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Reader Comments (1)
I received these two questions via email in response to this blog post:
"Is the 200ma on the 15m chart the same also as the 600sma on 5m and 50sma on 60m? do you just gap trade the index? vs a list of 10 or 20 stocks to watch?"
Yes, assuming the charts are using the same session times. Most moving averages default to calculating the moving average based upon the close of each bar, so technically there could be a minor difference since the 600 ma would be based upon the average of 600 x 5 min bars (vs the 200 x 15 min bars). For example, I show the 600 sma on my 5 min chart closing at 954.65 on Friday and the 200 sma on the 15 min chart closing at 954.47. That's close enough for me.
Question 2: I primarily trade opening gaps in the S&P 500 index futures, but am starting to dabble with stocks at the request of some customers. I will start posting stock examples and research in this blog in the near future and may even expand my signal service to include some favorite stocks. Thanks for the questions Travis.