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.

Getting Gap Blocked!

Another Monday in the books. I had meetings most of the day. I don't like Mondays.

S&P Reviews Ratings on Europe
I will cover the gap up open again that happened this morning more in the below section. Late in the day stocks weakened as a report came out that the ratings agency, S%P, was going to possibly downgrade the debt of up to 6 countries from the Eurozone. In this way Twitter is amazing because you could have seen it all happen in real time. After the close here was the headline (via Zero Hedge):
Rumor Meet News: S&P To Put All 17 Euro Nations On Downgrade Watch
So it was not 6, but 17!

I have two thoughts on this.

One is that S&P put language in the release that makes the possible downgrade very contingent on the results of the Euro summit on December 9th.

Two, this was certainly known by the big players and now the pressure on anyone not on board a total rescue agreement is enormous. A debt downgrade will kill most efforts to get a handle on the crisis.

Is this the big homerun setup market players have been hoping for? It certainly fits!

Getting Gap Blocked!
(Note: I posted this on the iBC Blogger Network and would appreciate if you would swing over there and drop me a vote and a comment. Twitter folks can RT for big points! See it here.)

I usually will do stock screening on a Sunday night to get set up for the week. I use the PPT and screens I built to look for ideas. I then discuss them with the Pelican Room in 12631. As I was screening it was becoming more and more clear that after the huge run over the past week, things needed to slow down. Various indicators (PPT Hybrid and others) were showing some caution was warranted. I went ahead with a full night of work anyway so that I would have some ideas should markets come in a bit.

Whenever I am looking to open positions I never want one thing: a gap up open. Gap ups distort pricing and can add a layer of noise to a pattern you may be looking at. Depending on your targets for a particular stock, a gap up can sometimes eat some or all of what you were looking to capture. Looking at my Twitter stream this morning I could see what was coming, a gap up open again.

I wait for the first half hour to pass when the market opens before I will get involved. When I took some time around 10am to look things over from my list, this was the first one I saw. CSOD (click charts for larger view):

CSOD came from a screen looking for buying accumulation. I liked the chart and was very interested. The stock opened up 15% or so and closed up 12% on the day. One day. Clearly there is something going on in this name and it's run away before I could do anything. Gap blocked!

Last night in 12631 I highlighted a pattern I like to play when I see it. The stock TXI printed a monster wick on massive volume on December 11. When this happens many times price will migrate back to the limits of the wick (both up side and downside) so when I saw this one I knew I was going to be interested. TXI after today:

The stock closed up 6.4% just today! Gap Blocked! To be fair, if the wick play holds this name could run up to around $35-$36 so I am still interested in this one.

As if trading in this market did not demand the very best execution already, gap up openings make things that much harder. Over the course of the day the big morning gains were given back by the indices (though not these stocks) which added to frustrations all around.

Have a good night.