Tuesday, June 14, 2011

Large gaps

Large gaps -- gaps that are the size of an average day, currently about 10 points in ES -- are likely to move away from the gap rather than close it. This usually implies a trend day. A large gap day that tries to close the gap usually ends up moving far beyond the close of the previous day but a gap that tries to extend its self may find resistance and the early price action gives some clues.

A strong move up early on strong trend bars usually means possibly a large day and a early move of overlapping bars with tails may mean limited movement after the early move. A shallow trendline break (b15-25) may mean a trend termination without a reversal. Often on strong days such as this a strong AM trend and a shallow trendline break is followed by a channel type move. This is because on a higher timeframe this actually is a spike and channel. The channel should never be shorted until it has its own trendline break (b50-55) followed by a test of the extreme.

In general, large up gaps followed by a trend made up of average or small bars is fairly easy to trade if you take only with trend entries near the ema. A rough rule of thumb is to only trade with-trend near the ema until there is a successful close below the ema (b57) and then exit on the next push up (b67).  Buying second attempts above bull bars only will usually protect you from being stopped out.

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