Meta-Trader - Mind the Gap

Welcome back, Meta-Traders.

One of the more reliable behaviors I have seen in price action lately in the stock market is the Gap Fill.

On your left find a 5 minute chart of Boeing (BA) from this past Wednesday, March 27, 2013.  Pretty much every other stock and the indices had the same gap down as indicated by the almost pattern matching action of the white line which represents the SP-500.

Since we were in the middle of a bullish period caused in part by end of quarter window dressing, this gap down was a gift for the bulls.  After the first few 5 minute bars, it seemed clear that the price was going to fill the daily gap, so I did a trade in a very similar chart QCOM, and bought the Weekly 60 call at 6.22 looking for a move back up to yesterday's close at about $6.60.  I ended up closing the contract at $6.58, not bad for a days work.

I recall Hubert Senters saying recently that about 85% of all all gaps are filled, and I believe it based on what I have seen lately.

For another example, take a look at luxury goods retail Michael Kors KORS on the daily chart.  This stock gaps a lot both up and down as you can see on the daily chart.  Notice that about every gap is filled with 2-3 price bars.  Also note that most of the gaps occur within the context of previous price action.  Those gaps have a higher tendency to fill than those outside recent price action.  For an example, of that, take a look at the highest price bar on the KORS  chart which is gap into new territory.  I actually bought this gap and ended up losing money on that trade.

Finally, there's one last type of gap example which would be consider the "runaway" gap.  This is gap which is outside recent price action or even outside of the historical price action of the chart itself.  For an example of that, take a look at the chart of Biogen Idec BIIB.  If you examine this chart carefully, you will see there were 2 runaway gaps on this chart this year.

Runaway gaps have much less of a chance of getting filled particularly of they occur on some type of important fundamental news such as was the case with Biogen Idec.

So pay attention to price gaps since they provide some very reliable setups for trades as follows:

• For a gap fill on a daily chart if the gap occurs within the context of recent price action
• For a gap fill on an intraday chart where you are expecting the stock to close the gap and return to the prior day's close by the end of the day.
• For higher prices ahead if the gap occurs outside of recent price action.  And if the gap is into new all-time high territory, expect higher prices ahead.

So Mind the Gap and enjoy your weekend.