Looking Beyond the Gap

Morning trade and pre-market is always interesting. Hedge Fund managers and people even like Cramer admit that futures are heavily manipulated to influence the open. When I see a gap up, I don't automatically assume that it's bullish, in fact a gap up can set up some of the best reversal signals.

We saw some strong closes today, like AAPL on a daily chart, but an intraday chart reveals that all of the gains in AAPl were made in approximately the first hour an a half of trading, the rest of the day was lateral, so the daily candlestick which looks strong, doesn't tell the entire story.

Some charts that gapped up, however that gap turned out not to be such a great thing on the close....

VALE gapped up and held the gap, but in doing so created a nearly perfect "Evening Star" which is a reversal candle-to the downside.

DO also had a nice gap up, however, this turned into another reliable reversal pattern, a "Bearish Engulfing Candle"-another reversal candle to the downside.

M put in a "Shooting Star" reversal candle off the gap up.

GDX gapped up only to create a very bearish engulfing candle. Look at the reversals that occurred after the last 2 bearish engulfing reversals.

As you can see, the nice gap up in WDC turned out to be a perfectly formed Evening Star Reversal Candle.

The point being, what you see is not always what you expect. You have to look closer, beyond the daily candle, beyond the headlines and look at the market. The market will tell you a lot about itself, unfortunately too many of us get caught up in the % gain, that's called pure laziness. Anyone with 30 seconds to spare can get that information. Taking the time to understand the breadth of the market, the stability of the move, confirmation, etc-will give you a better understanding of what comes next, not just what occurred today.