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What’s gap psychology?

Yesterday I did a pre-market show for Simpler Trading’s Facebook account, and there were a lot of great questions I was able to answer during that segment. So I wanted to take the time to highlight some in particular.

If you’re interested in the rest of the segment, you can hop over to our Facebook page and watch the whole thing. They’re always streamed live too.

With that being said, here are my thoughts on the market right now…

We’re seeing good news for the market right now with these highs. The idea though is that what we have right now is probably going to run a very similar route in terms of what we saw with the initial first half of the day rally. Monday morning you could already see the S&P moving up higher.

In cases like this, I get a lot of questions like…

“Ragh, can I still be bullish at these heights?”

I can be bullish at these heights, of course. But that doesn’t mean I want to be buying up here. There’s a distinct difference between waiting for even a shallow correction to an exponential moving average and buying at brand new highs at 30,000 which is just unbelievable.

It really is just unreal when I’m looking at these markets, Gang.

So make sure you start differentiating when you’re talking about this market.

The directional bias in the market right now is bullish. So “yes” I’m technically bullish. But being bullish up here is not the same as, “Are you willing to be a buyer up here?” I’m not going to buy at the highs… that’s not gonna happen.

In fact, during the open yesterday I was looking for a quick setup for a gap fade.

And that brings us to another question I wanted to highlight from yesterday’s segment (now that you know my general market outlook)…

“What’s gap psychology?”

A dual confirmation approach that looks at the 3pm central close (in this case that would be Friday) and yesterday (Monday’s) 8:30am open in relation to each other (i.e. is it above or below). But that’s not all, the second criteria is we look at the regular trading hour high (because in this instance, this is a gap up) and is the 8:30 open opening above the regular trading hour high. Criteria is just as important as opening above the 3pm close on Friday.

Both those criteria were clearly met Monday morning, and it was a significant gap up at that.

So as a day trader yesterday, I was thinking about focusing on the intraday gap as a potential fade. That doesn’t mean we play the gap right on the open, we look for a specific pattern, and then we fade that potential break down.

The second thing about gaps, Gang…

Don’t look for the close.

This is for those of you that are comfortable with Fibonacci retracements… If you can get a retracement, look at the gap itself as well as the hole (the space between the close Friday and the open yesterday), and the hole (gap) I’m looking for is maybe 38% – 50%. I’m never looking for a gap close. They do happen but it’s a low probability expectation, and that’s not what I’m going to look for.

You can be very successful just playing a gap fade in the morning without waiting for the gap to close. Don’t overstay your welcome on these, Gang.

If you want the rest of my commentary on gap psychology, feel free to check out the rest of the pre-market Facebook segment HERE.

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