Market gaps and overnight reversals

With the ramp of 4^th quarter earnings season coupled with high volatility of the recent selloff, expect daily market gaps and possible overnight reversals to make swing trading very challenging over the coming weeks.  Fast morning price action with whipped up emotion as result roll-out will likely produce a lot of head fakes whipsaws in the intra-day price action.

Avoid gambling and be very picky about the trade setups you take during this period.  Always check current holdings and stocks your interesting in purchasing against upcoming earnings reports.  Plan trades carefully that always include an exit plan if your wrong to avoid emotional decision making in the heat to the moment.  Consider reducing position sizes as a method of controlling risk during just high volatility events and be willing to scale out of positions or take profits sooner amidst wild price action.  If I stock happens to gaps in your favor, remember that gaps are gifts, take and be grateful for what the market has given you.

On the Calendar

The Tuesday Economic Calendar begins at 8:55 AM with the Redbook Report.  The most likely market-moving report of the day is Industrial Production at 9:15 AM which expects a 0.2 gain with manufacturing also up 0.2 percent.  The Housing Market Index and the JOLTS report are both at 10:00 AM.  Housing according to consensus is expected to remain flat with a reading of 67 while forecasters see job openings in the JOLTS report holding steady at 6.905 in August.  We have two-Bond Auctions at 11:30 AM with the Treasury International Capital report at 4:00 PM.

On the Earnings Calendar with 4th quarter earnings ramping up, we have several notable today.  Before the bell, BLK, JNJ, GS, MS, PGR & UNH are among those reporting.  After the bell, CSX, IBM, LRCX, NFLX, & UAL are some of the big names reporting.

Action Plan

Following a day of disappointingly choppy price action where the Dow lost 89 points the early morning futures are suggesting a substantial gap up at the open.  As frustrating as it is to be getting overnight gap reversals I think we had better try to get used to it as we enter the ramp up to 4^th quarter earnings season.  Asian markets were mixed but mostly higher overnight while European markets are modestly higher this morning.

Expect volatility to remain high and always be careful not to chase morning gaps.  As I mentioned yesterday, the market internals suggests a bounce or reversion to the mean after such a sharp selloff.  I think the most telling of earnings reports today will be when NFLX releases its numbers after the bell today.  The beleaguered Tech Sector could sure use a win, but there is a significant concern that the so-called FANG stocks may see troubled waters ahead.  Let’s hope the fears are unfounded because of a poor report from NFLX could add insult to injury in the techs.

Trade Wisely,

Doug