3-Day balance and Gap down … Gap rules
We opened on a big gap down ( 0.50 ) with overnight inventory short.
Remember yesterday I noted that it was not that weak because of higher value , weak sells and low volume on a down directional move.
I had three levels at the open which was considered as key ones.
- Yesterday’s gap 51.92
- Level to trigger overnight inventory short covering 51.61
- 3-Day balance low 51.48
We opened at 51.42 and traded above and below that level showing initial low conviction.
The first two gap trading rules are applicable to today’s market :
- Go with all gaps that aren’t filled relatively quickly.
The low conviction seen in A period eliminated the first rule which was also putting a short trade on the sideline at least for the immediate future.
My mind shifted on long trade opportunity. “B” traded up to my 51.61 level where overnight inventory was getting challenged. We also re-entered inside the 3-Day balance. A good buying level was a return back to or around the balance low at 51.48 which happened in “C” period. Target was the fill of the gap.
2. Go with a gap on a failed attempt to fill the gap that slows in tempo and shows declining volume. This includes gaps that fail to fill or are filled to the tick and then price is rejected.
The second gap rule was the reason why a sell opportunity should have been considered at “D”, “E” or “F” high. We went 2 ticks from filling the gap with low volume. Just look at the Volume Report from Pro Suite software for USO (ETF) during “D”, “E” and “F” period. It was lower than for the same period from yesterday on a very low volume day. Stop should be above the gap level at 51.92 and target should be at least to the POC for the day.
These were the two opportunities that offered the best risk-reward trade. The day finished with a prominent POC at 51.59, dominated again by weak hands.
Good Trading !