Trading Gaps
Trading gaps requires two different approaches, partly depending upon where price opens. Recently I’ve pointed out a number of occasions where price would open at a 127% external retracement of a previous move and then immediately reverse. That wasn’t the situation today.
Today we opened slightly above the 162% external retracement of yesterday’s last decline. It is between 127% and 162% that I watch carefully for reversal signals. Once we pass the higher measurement it usually means that price will continue for a while. Before I show how today’s continuation and final top made trading sense, let’s talk about yesterday.
On the 15 minute timeframe I was watching a large triangle break to the upside. I didn’t mention it on the site because there was no increase in volume with the breakout. As I’ve said many times, an upside breakout without a volume increase will often fail. But just because they often fail doesn’t mean that some won’t work out. You must decide which is more important to you — never missing a “good” trade or having a higher percentage of winners.
When we opened with a nice gap this morning I wasn’t thinking of triangles, but of gap statistics. I hope those of you that have been reading this commentary for a while (or have read the more than 150 days of archived analysis) were thinking of the Victor Sperandeo quote I first posted last November after a similar gap.
If there is a gap, and it is going to reverse, it will do so 10 to 15 minutes after the opening 95 percent of the time.
In that post I also mentioned how to find a logical target for specific measuring gaps such as we had this morning. It was certainly nice that both the measuring method and the triangle target were at the same level, because that’s precisely where the rally stopped.
The easiest way to find the primary target for a triangle is to draw a parallel trendline to the edge of the triangle. This creates a trend channel, and these channels are often where price finds serious resistance.
The gap measuring method says that a continuation gap occurs approximately half-way through a rally or decline. You’ll notice that this measuring gap met the requirements.
A third reason for profit taking at that level was the pivot high on March 22nd. Today’s high was within a point of that chart resistance. We then spent the rest of the day creating a small rectangle.
Of course this all assumes you got into the trade by remembering Trader Vic’s statistics. His book is an excellent trading resource — see below.
For More Information:
Victor Sperandeo: Trader Vic - Methods of a Wall Street Master
[…] Today is an example of multiple versus individual signals. At the bottom marked “A” there were three reasons to expect a reversal at almost exactly the same point. At “B” there were also three potential reversal signals. But at today’s close I can see at least four different levels where a reversal would fit my trading style. And they are not the same. At “A” we were making a double bottom with the pivot from June 8th. At the same time we finished an external retracement of 162% times the rise to “X.” That is often a Fibonacci turn measurement. And if you’ve learned how to use continuation gaps as a measuring tool, the distance from “X” to the center of the gap was exactly the same as the distance from the center of the gap to “A”. (For a refresher, see Trading Gaps from early April.) […]