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Wednesday, April 14, 2010

Gap Trading (NASDAQ:QQQQ), (NYSE:SPY), (NYSE:DIA) April 14, 2010

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Gap Trading (NASDAQ:QQQQ), (NYSE:SPY), (NYSE:DIA) April 14, 2010

The stock market opened with a gap. The price jump has been attributed to INTC earnings. There is a statistics that says that 70% of the gaps fill. They however do not say how long it takes to fill a gap.

If given long enough a time, most gaps fill. There is a theoretical reason for gaps to fill. If the market follows the log normal hypothesis, it can be shown that the probability of a gap fill is almost one. It would be interesting to study the distribution of gap fill distribution. Gap trading is one of the most discussed topic in trading. The focus is generally on the probabilities, when in fact it should be on the time it takes for a gap to fill.

10:09AM: QQQQ is at 49.64. Timing models suggest to us to start scaling in on short side.

Few moments later, QQQQ visited 49.51. That is one cent from today's low. We expect buyer to be in that area.

The second question about Gap trading is whether today's market gap would turn to be an exhaustion gap.

2:07PM: QQQQ at 49.77. Models are telling us to fade this upmove on retest of high. Today High of day for QQQQ EFT is 49.80, which is only 3 cents away.

2:33PM: Here comes the retest of today's high. QQQQ now at 49.79.

3:06PM: QQQQ at 49.76. It failed to break through the high, and is retreating but timidly so far.

3:30PM: QQQQ revisited the high and violated it. So the fading posture is put on the side. We wonder what the new buyers have in mind in terms of profit target.

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Happy trading,


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