Monday, July 11, 2011

July 11, 2011 Recap

Good evening traders,

I have been wanting to do a blog post on one of my favorite trades, The gap fill. This trade is a bread and butter move for most traders because of the frequency with which the setup occurs and the high win rate. Unfortunately there hasn't been many gap fills to write about. We barely even get a half gap filled anymore! I understand it is mid summer and the market dynamics are different during this time of the year, but I feel like this has been going on for months. Some traders attributed the decreasing of this phenomenon as a result of government intervention in the markets. The Fed's bond purchases and the increased volatility caused by the debt crisis in Europe seem like plausible explanations. However, I don't think anyone will ever know the truth. Regardless of what's causing the lack of the "gap fill phenomenon" one thing is certain, there will be a reversion to the mean. Keeping that in mind, its still important to know the trade and it's rules. I will revisit this topic in the future. When I can illustrate it in real time

Today's trading was boring to say the least. the majority of the day we spent chopping around a 4 point range. If you bought the opening swing breakout in the direction of the gap around 1324.00 (always a high probability trade) you were lucky to get 2 points before resistance in the 26.00-27.00 range capped the upside for the morning, and the day. Remember that the first 90 minutes of trade is likely to contain either the high or the low of the day!

Once the initial balance formed we were trading at initial support for the day in the 19's. Typically, the gap fill traders will puke up their positions around 10:30 est - 11:30 est. This presents you with two opportunities. One is to try and catch the late shorts then jam them back up into the opening range. (If you aren't market minded send me an email for an explanations). The other is to go with the trend. Given the bounce back we had below 15, I thought the trade was going to be trap shorts. I bought at 1315.25 just after 11:00 and the trade worked well. However when priced failed to get above the midpoint or VWAP(volume weighted average price) that was a good signal to take profits or initiate shorts with the anticipation of range extension. At the end of the day, price was ultimately kept above the monthly low and the S&P's 50 day moving average. I would consider this a pullback within a larger uptrend.

Bigger picture; If we are to continue higher I'd say its likely we back and fill down to the 1290's. Or until the US budget is figured out, and fears of contagion in Europe subside. Today marks the beginning of summer earnings season, so be vigilant. Trade smart, don't gamble on earnings. Remembers "Traders know when to quit, Gamblers press their luck." Good Luck and thanks for reading.


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