The market took a surprising dump at about the 10am mark breaking through both the 200-day moving average AND the upward trend line established back on 7/6 – both strong negatives for this market. It wouldn’t take much for the market to recapture both of these, but it will need to start making up ground right away.
In any case, I wanted to review this mornings gap-down in the markets, and whether this was a trade worth making. I’ve created a gap fade four-point checklist for determining whether to fade the gap in the morning or not. Let’s see how this one measures up.
1) S&P under 10 points? No – No trade.
2) Is the gap being driven by news? (earnings, economic report, etc.)? Yes, Employment – No trade.
3) Is the gap large enough (more than 1 or 2 points) for me to trade? Yes.
4) Is volume reading on the future indicating there is a lot of support for the gap at the open? Yes, above average volume readings – No trade.
On three out of the four requirements, this set up does not pass muster. So it is a NO-GO. All four points must be met.
