The power of a gap...

First, I made money today - and for that I am happy.

I made money because I took the time to plot a setup first thing this morning when the futures firmed and the potential of a gap presented itself. All of the analysis in the "Long Play" post played out well. Specifically, the entry at 1031 and test of 1036 - which turned into 1038. But what really worked for me today was the counter trend short plays which I took near the highs.

You may ask why I took a short at the high - afterall the high broke 1036 and my thesis called to go long at that point. The answer is simple - GAPS. Open the chart and you will see that we opened with a gap and we peaked with a gap. I believe both of these gaps conspired to create a great short opportunity.



When we failed to print longer solid bars above the final gap, it became clear that it was of type "exhaustion". Of all gap types, the exhaustion type is most likely to fill. The smart play is to short the action to the bottom of the gap. Further, if the gap fills quickly you have a bearish signal and there is a very good chance that the price will retrace to the start of the rally leg. Remember, I am talking about exhaustion gaps. Many other gaps can, and do, fill quickly and then reverse with strong price thrusts back into the trend.

My confidence in the short position was strengthend by the presence of the opening gap between 1025 and 1027. Here is a close up of the little guy.



Adding confidence further was the fact that we retraced 68% on the first pull back from the high of 1038 (when a fib is dragged from the prior session low). This is also bearish and is often followed by a slow rise which is met with selling pressure towards the top. Think about all the folks who bought into the gap assuming that we were breaking out. All those folks had to wait the long trip back. Typically, they dump just to get even... From that point forward we had the price action respecting the retracement levels which again aligned very nicely with support and resistance of the past session.

I think we are still exhausting the top phase of this past rally leg and have not filled the continuation gap at 1018! Chances favor filling the gaps at 1027-1025 and the continuation gap centered at 1018. If they do not fill soon - they will remain as an anchor for eventual retracement.

Also, I introduced the hourly chart no too long ago. I used that chart throughout the day. There is some choppy action out there and I got gunned several times in yesterdays session. When that happens, it may be best to move up to the 60 minute view of things. Here is a view of that chart - as you can see, it is very possible to fill the 1027-1025 gap in next bar or two.



Consider that we recently penetrated the top bollinger band sharply and it is typical to come full swing to the bottom bar.

I'll be studying setups tonight and hope to post my game plan before shutting down.

Good luck trading.