Big gaps, high emotion – A dangerous combo.

The sell off last week spiked the VIX more than 65% suggesting elevated volatility and challenging price action ahead.  A Monday morning professional gap up of nearly 100 points only increases trader emotions.  For years I made the mistake of getting caught up in the drama of this kind of price action.  I would chase it down and chase up thinking I was missing a big opportunity to make money.  After years of poor results, I finally wised up and realized that often less is more.

What I mean by that is commonly traders get caught up in the idea if the market is open then they have to be trading.  That is just not true!  The best traders in the world watch and wait much like a sniper patiently for one shot.  I found that if I could avoid the drama, watch, wait and plan I traded less but made a lot more money.  My win/loss ratio went way up, and my trading account started to grow rather than the endless Yo-Yoing I had been experiencing.  When the markets become volatile, it is easy to over trade and get caught up in the drama.  Not every day is a good day to trade if you want to maintain your edge.  Always remember sometimes less is more!

On the Calendar

The Economic Calendar decided to extend the weekend by largely taking Monday off.  Other than a bill announcement and a couple of bill auctions there is nothing on the calendar today.

Today is the last big earnings day for this quarter with about 220 companies reporting results.  Earnings have been a major source of inspiration for the bulls this quarter.  I will be interesting to see how the market responds as that energy supply begins to burn out.

Action Plan

As anticipated, the Korean worries prevented the Bulls from mounting a rally on Friday.  The good news is that the Bears were also unsure about the weekend and most of them seemed to join the Bulls in taking the day off.  Only the QQQ managed to end the day with a respectable defense of the 50-day moving average while the SPY closed below the 50 for the 2^nd day in a row.  With the threat to the weekend now past the Dow Futures are currently pointing to a huge gap up open of nearly 100 points.

Although the gap up this morning is not that surprising, it’s also something that I don’t want to chase.  Keeping in mind the overall price pattern the morning gap up will still be under significant price resistance on the SPY, QQQ, and IWM.   Always keep in mind that a gap up the perfect setup for a pop and drop or whipsaw price action.  I refuse to chase, so I will be standing aside for 20 to 30 minutes allowing the price action develop.  If the Bulls step in supporting the gap with actual buying then and only then will I consider new long positions.  Until that time I will carefully manage the positions that I held over the weekend that hopefully will benefit from the bullish open today.

Trade Wisely,

Doug