One of the easiest targets in short-term trading is to fade a large opening gap, either up or down.
For example, on a gap-up, much of the opening pressure is often due to technical reasons: trapped shorts looking to restructure their risk profile, and indexed long-only money that must ratchet-up their exposure strictly in response to price action, not their market views. Additionally, there are always those bulls who see only their side of the risk coin and look at the gap-up as positive reinforcement of their views. All of this money buys the open as other more balanced & patient players naturally sell into it.
However, the art to the science is identifying those few gaps that are not worth fading from a risk perspective.
Given the continuing problematic fiscal backdrop in Europe and the US, one might think this morning's likely 35 handle up gap is worth a shot on the downside, either via puts or a leveraged ETF such as SDS TWM QID.
While I think it might be possible to coattail as the market-makers pull the SPY back maybe a point or so, I would generally tend to avoid fading this gap, as it appears to me it could have some staying power.
Consider the following factors that may "levitate" the gap for days or even weeks :
1. huge hedge fund Euro shorts probably surprised at weekend progress in Europe and potential to fast-track agreements for tighter fiscal integration in time for Dec 8 EU leaders meeting in Brussels; many will be forced to cover
2. ECB/IMF deal to fund bailout of Italian debt could reverse Euro plummet and kill dollar rally
3. strong Thanksgiving retail sales could kick-off an early Santa Claus rally
4. underinvested long-only money may find themselves suddenly dragged into a performance-anxiety driven run-up to year-end as they chase undervalued US equities
5. US high-frequency economic stats could continue to surprise to the upside
6. increasing chatter re 2012 QE3 MBS purchases by Fed
I definitely rate the chances better than even that the market climbs even higher sometime in the trading day. If it does, and the 122 gap-down is filled, then it might be time to put on a short-term short.
However, closing this morning's gap back to 116 ( where the SPY traded after-market on Friday on news of S&P's downgrade of Belgium sovereign debt ), may have to wait until 2012.
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