The Gap Guy

The past two weeks have been a blur with the release of Otis 4.5 (latest version of my gap trading system) and my various presentations at the Las Vegas Traders Expo - which ended this past weekend.  I do plan to post at least once or twice on most weeks, so you may want to subscribe (on the right nav bar) to receive email delivery of my blog posts and avoid having to check the site for updates.

This morning's gap was above Friday's high price. As I explained to members at www.masterthegap.com, "Otis is suggesting a discretionary "long" signal (i.e. "go with" play). I will wait until after the open to evaluate market internals..."   The signal was "discretionary" since the sample size for this particular pattern was smaller that I am willing to trade with normal position size. Even so, I knew that I needed to be looking long and not to consider a short / fade of this inviting-looking opening gap.

One of the concepts I discussed in Vegas was the importance of knowing the market's "mood." Contrary to what many traders think, shorting "up" gaps during down/bear markets can be quite risky. Even thought one might think fading counter-trend gaps might be a good strategy, in reality, it is not.  Check out the following:

Note how shorting "up" gaps (targeting gap fill and using an end-of-day stop) when prices are below the 200 daily MA shows the lowest of all historical win rates (data is from the e-mini S&P, 1998-2008). This setup also shows the lowest profit factor, meaning that the ratio of profits to losses is not only negative, but it is the lowest of all 4 scenarios.  Why? Because "up" gaps during weak and oversold markets will often become trend days as shorts are forced to cover and bargain buyers step in.

In case you missed it, I have an article published in the December (currently available) issue of Active Trader magazine. It also shows the value of knowing the market's "mood" (by using daily moving averages) when using gap zones. The QQQQs are used as an illustration.  Active Trader is available at most major book stores, or you can check out the electronic version at their web site:

http://www.activetradermag.com/

Below is a 5 minute chart that shows today's trading action for the E-mini S&P 500. It was a good call by Otis to not fade this one. (white = today's open, blue = prior close, green = prior high, red = prior low, purple = 600 SMA).