Patience After Morning Gaps

One of the biggest mistakes I see traders make is that they get too excited right when the market opens. This is particularly true after a sizable gap higher or lower to start the session. I think many of us can agree that the first 30 minutes of the market are very volatile. If you have been watching the market over the past couple of months, you might say the whole session has been volatile. But knowing not to get caught up in the early market action can improve your chances for success further down the road.

Let’s take a look at a recent example of when the market gapped lower and it looked like it was going to zip higher right after the open. When the market has been moving lower and then there is a gap lower, the odds are that stocks will recover some, but maybe not right away. This is where timing becomes important. Take a look at this 5-minute chart below.

The market had moved lower the previous couple of sessions and then gapped lower to start the day. I like to see if a base forms after a few minutes and then look to see if I can get a 2-bar close (2 consecutive bullish closes) over the resistance level formed from the base. As you can see above, it looked like it was going to move higher but then failed and stocks moved lower.

As the chart shows, that level was tested again until it eventually broke resistance as the SPDR S&P 500 ETF (SPY) moved higher. The SPY eventually ran into its 200-day moving average (red moving average), which could be considered another form of potential resistance.

This was a quick lesson to be patient and wait to see how early trading develops. Let some support and resistance areas form before having an opinion on which way, if any, the market will move after the initial open. Then if you get a 2-bar close on whatever time frame you are using below support or above resistance, the odds are on your side for a continued expected move.

John Kmiecik, Market Taker Mentoring

Trader Education