Daily Reflection: 05.18

18 May

Right from the open signs pointed to a gap fill, let me explain. Local pit traders (those trading their own capital) vs. brokers (those trading client capital) tend to fade the opening gap on the open of each morning. This means if we gap up, they are looking to sell, and if we gap down they are looking to buy. Knowing we never want to fight the gap fill (going long on a gap up, or short on a gap down). However some days we call gap and go days, that is, we gap up and move higher all day. We need three things for a gap and go day to happen, a gap (obviously) strong breath in the direction of the gap, and $BANK trading in the direction of the gap. We also look to the ticks for additional confirmation.

So now let’s rewind to this morning. We had a gap up, strong breadth of 7:1, however immediately after the opening bell, the $BANK index began to fill its gap. From here we look to the core sector list where we saw the SOX, XBD, and BKX all trading in the bottom of the list, as well as XLF in the bottom of the SPDR Sector list. This weakness in these core sectors led the markets lower and they remained weak all day.

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