The Gap Trade Concept
Now that you can spot gap trades, this is the concept: When a market opens gap up (G+), there is a tendency for the price to retrace following the emotional buying that promoted the gap higher opening. If the price of the stock or SSF then falls below the high of the previous day, there is a tendency for the rest of the day to be lower and for the SSF to close lower than its open as well as lower than the high of the previous day, as illustrated in Figures 11.3 and 11.4.
At point 1 in Figure 11.3, NEM opened above the high of the previous day (point 2). It later dropped below point 2, giving a gap sell indication and close at point 3, lower than the price at which it triggered a sell pattern. At point A, prices opened above the previous daily high, B. Prices then declined to close at point C for a profitable day trade. At point D, prices opened above point E. When prices dropped below E, a short position would be entered and closed out at the end of the day, in this case, profitably.
Figure 11.4 shows the gap sell signal in NVDA. Note the gap higher open at A and penetration below the high of the day (A) and then the close well below the high of the day (A) at point B.
When a market opens gap down (G-), there is a tendency for the price to retrace following the emotional selling that promoted the gap lower opening. If the price of the stock or SSF contract then rallies above the low of the previous day, there is a tendency for the rest of the day to be higher and for the SSF contract to close higher than it opened as well as higher than the low of the previous day, as illustrated in Figures 11.5 and 11.6.
Gap Higher Openings in Kaufman and Broad (note + signs)
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