By Hedge Ly
There have been quite a few stocks gapping up or down which exhibit similar trends post gap. It has taken me a good deal of time to really understand the mechanics behind why almost every relatively high beta stock trades flat after a gap. I could be totally wrong but at least i have convinced myself this is what is happening so i can avoid the undue stress of a non performing trade!
My thesis is there are clearly resting orders in the book which are not retail. * so DONT fight them.. trade WITH the gorilla, or in the direction they are trading. POST gap scenarios 1. orders will stop a stock from falling further than the gap 2. gaps up simply move as high as anyone is willing to pay then a resting order is placed in the book on the bid so HF trading algos will step in front and do they dirty work of supporting a stock until a new set of bidders come in and push her higher. As for the downside you see a different story playing out. Take TXN for instance; Wednesday she gapped down on clear sell side conviction but hit a brick wall @ 25.50 where someone actually showed a 2000 lot on the bid (2000 x 100 = 200k) ontop of a 1000/1000 market on a few exchanges. The HF algos already sniffed this order as it was oming to market, then stepped in front and the party was on. TXN never looked back trading up to 26 on a clear up trend. What aggravates me about these set ups is clear manipulation. Obviously TXN wanted to be sold but some fund or funds were exploiting the opening print volatility with an upside skew. They are exploiting the low volume enviroment..they know 1 hour into the session interest will dry up.
Upside skew brings me to gaps up, the chart above is of NVDA, you can see the clear gap and the subsequent flat but slightly upward sloping trend. Again this is the algorithms at work keeping these things bid as the actual real human market interest dries up. Key word "human". Most of the volume and business is done in the early AM these days, once the business is done you will see any stocks volatility and range become sideways. BECAUSE most speculators are still out of this market, ie no real retail interest after the fundies do their heavy lifting. Those supplemental liquidity providers are in place to help keep the markets from doing this all day everyday. I gotta give them some credit i guess.
So how do you profit? Well for one get long gap downs with a stop at the low tick of the day. This strategy would have worked with MW TXN and PEP on Wednesday. On gaps up place your stop at the first support point post gap. ie if GS gaps to 150 then trades down to 149, place your stop at 149 and let it ride. Chances are you will see a very slight upward trend which you must be patient with. Most gaps up are giant ascending triangles which take the entire session to break higher as lower lows keep getting tighter and tighter to the resistance line put in at the open. I will try and post some charts of flat gaps tomorrow after the open.
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