“Respect The Gap”

I started the write an article about Rule #16 “Respect the Gap” a couple of months ago and half way through it I stopped and realized that I was going to probably confuse more of you than I would help. But having said that; Tuesday and Wednesday’s market open and closing prices have left me no other option than to try and give you a small glimpse into the importance of the Gap.

In the movie “The Matrix” the computer program sometimes skipped or repeated; what we often refer to as Deja Vu. Gaps in the charts often work the same way and can cause a repeat in a patterns support or resistance tests. So gaps are important to account for in any stocks chart before you put your money behind what appears to be good support or resistance. Of course differently positioned gaps mean completely different things based on individual chart scenarios and I don’t have the time to explain that too in-depth here; but it’s very important for you to understand that Gaps are very significant in determining absolute support and resistance.

It’s also important to recognize that gaps can give you important clues as to where resistance and support truly lie on the charts.

And as a warning; when you here someone say that a gap needs to be filled; ignore this persons technical analysis from that point on. There really is no need for a stock’s price to ever fill a gap no more so than at any other price point. This is just another meaningless phrase that has been repeated so many times that traders feel comfortable making the analogy whenever the event occurs. But trust me; its nothing more than a mere coincidence.

On Tuesday morning the $QQQ  gaped up on the open to $74.25; which was $.01 above major resistance; then it ended the day below that resistance point @ $73.62. Then; Wednesday it gaped down and opened @ $73.58; also $.01 below decent resistance.

I saw this and immediately started to form an hypothesis as to where it might close in order to position myself for a better trade for Thursday – Friday.

On Tuesday morning I posted that $74.25 was good resistance in the $QQQ, I knew that it was exactly $74.24 but I didn’t want to fool with that $.01. As it turns out that $.01 may be very important.

Nothings for sure of course; but if the $QQQ tests $74.26-8 it could prove to be a nasty 3rd test on a long-term (3 year) trend line and we could get a significant 2-3 day reversal/sell-off in many NASDAQ stocks. The move down today took out support @ $73.12 and the prior two days eliminated support @ 72.76 and $72.83 respectively.

Now all of this is just a theory; but when I see several strategically placed Gaps like these that weaken important support below the current market and that also skip around to preserve big resistance above; caution is well advised in my humble opinion. Also if you took the time to read my article from Monday “Bears are Fast and Bulls are Slow” I basically told you what was going to happen Tuesday and Wednesday so that alone should add some credence to this warning.

So, given all of that; I covered my existing shorts today near the open; re-shorted and re-covered $NFLX and then spent most of the day studying. Covering shorts on a good size down open is often smart because premiums are inflated to a small degree and you can catch some traders who have to cover wrong trades paying up to get squared.

Stocks to Watch

I’m not going to recommend specific stocks to trade here because I want to see if this reversal plays out for the $QQQ and also on the $SPY where @ $167.07 the same hidden resistance lays wait; but with a little less punch. Just watch these levels especially if they are hit at the same time an ITM short of either might be the safest route to try.

I’ve got some specific ideas for shorts; but I’m afraid if I give them to you; you won’t wait for this crucial point and if I’m wrong you won’t pull the trigger to cut your losses short. Also some stocks may buck this downtrend due to rotation so be wise in any short position and stay away from obvious trades.

Also; at these levels you might want to sell or lighten up on your longs and of course if the market turns on these resistance points you won’t be as tempted to buy the dip.

As always – study more than you trade and you will succeed – good luck – PTP –



  1. No comments yet.

Comments are closed.