Complicated by Gaps

Winter has arrived in full force here this week. Single digits tonight and through to Friday. Knew it had to be coming, but still feels a bit shocking.

Complicated by Gaps
It was yet another gap up morning in markets today. I remarked via Twitter that:
"Gaps are like all in bets in no limit hold em; makes you decide whether you are playing the hand or not immediately. Difficult."

I wanted to cover two examples why gaps make trading more complicated (at least to me) and it's the very dynamic of facing an all in bet that fits in my mind.

Last night I did a full night of screening and homework inside the iBC trading room 12631. Even though markets had been a bit extended, I felt constructive when I found a bunch of good setups. And here is where gap up openings make things difficult.

I have traded the company TPC a few times over the last few months. It tends to be somewhat predictable and has several clearly defines areas of support and resistance. The stock was sitting right at the bottom of the channel it tends to trade in around $12.20-$12.30 and an entry here may be worth a run to $14 should markets hold up. This chart is after today (click any chart for larger view):

So there are two problems with the stock after today:
1-It went up 3.4% in a single day. It was up quite a bit more than that during the day as well. Nice run already and it was over as soon as the stock opened.
2-Now the candle printed today looks terrible, gap up and close on low of the day. Very "gravestone doji" like and gives me pause even though the location of the candle is not after a long uptrend.

So in this specific case the gap up turns a simple channel play into a confused mess.

A bunch of other items I worked on last night were not up so much that I would not buy them (SXC, TTEK, EOC, SNE). But I did not today. And that leads to the second part of gap frustration.

I made a point to highlight in my "Wills and Won't's" post that I would be aware of where the overall market was in a cycle when I was to open trades. Well, today's move up presents yet another ugly candle for many sectors. Most were running fairly overbought already. Here is a chart of the SPY with recent runaway gaps up highlighted:

Looking at the inverse fund for the S&P, SH, shows much the same thing on the downside:

These blow off moves have seen reversal for the last 5 months. Still want to wade into longs?

This brings me back to the no limit poker analogy. Right here you either have to call an all in and make your moves on the long side under the assumption that this will be "the" run higher that does not look back. Or you have to fold and either wait for confirmation of the move up or initiate a short trade against the overbought levels looking for reversal.

This could be a breakaway gap and a move higher could very well be on the way. I am suffering from the recency effect and have a respect for how nasty corrections have been from overbought levels for some time. For now I wait and watch and I have been gap blocked once again!

Have a good night.