Last week (Aug 24-28-09) we predicted that the market is going to decline into Friday. It did and when you look at the whole picture Thursday overextended rally did not help nor Friday’s gap up, however if you dissect it into day by day it looks amazingly accurate:

Full Forecast:

Monday:

Tuesday:

Wednesday:

Thursday:

Friday:

10 AM Morning Update for 11/5/2008

Please be aware, without respect to the EMF forecast, Price action at this time is neutral suggesting potential moves in either direction.

** ALERT ** Time= 1035: The current price action is bearish. Short positions taken on upside rallies may be beneficial between now and the close.

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Here is the actual alert our members received-

10 AM Morning Update for 10/8/2008

Price action at this time is bearish suggesting potential downside movement.

We currently have a gap or lapse condition of 0.00 points.
Please be cautious of the impact of morning gaps on price action.
Further alerts will be provided if market conditions warrant.

** ALERT ** Time= 1005: The current price action is bearish. Short positions taken on upside rallies may be beneficial between now and the close.

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More Alert Posts -

Tuesday Alert is Worth $2,562.50 :)

9-29-08 Market Crash! Daily Alert Results

September 23rd Alert

Forecast of the Day

NEW FEATURE - Daily Guidance Alerts

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Here is a comment sent to us today from one of our members:

“Hey, your last alert was right on. Made enough $ for the day. Thank you, keep up the great job!”
- Kava

Here is today’s alerts:

10 AM Morning Update for 10/7/2008

Please be aware, without respect to the EMF forecast,
Price action at this time is neutral suggesting potential moves in either direction.

We currently have a gap or lapse condition of 12.25 points.
Please be cautious of the impact of morning gaps on price action.
Further alerts will be provided if market conditions warrant.

** ALERT ** Time= 1145: The current price action is bearish. Short positions taken on upside rallies may be beneficial between now and the close.
If we have declined > 40 points in the near term, then successful
short trading may be diminished

More on DailyGuidance Alerts:

9-29-08 Market Crash! Daily Alert Results

September 23rd Alert

Forecast of the Day

NEW FEATURE - Daily Guidance Alerts

Try it today!

A morning gap occurs whenever there is a difference in price between the previous day’s close and the open in the morning. Theoretically, there are really two of these types of conditions that occur. A true gap is where the open is above or below the previous day’s high or low respectively. On a daily chart (chart provided compliments of TradeStation) this would leave a hole in the chart as in the image below.

As you can see in the graphic, the high of the third bar and the low of the fourth have a gap which is marked out by the horizontal lines.

Another case, that I believe was coined by Larry Williams, is where the open is above or below the previous day’s close but the price is not above or below the previous day’s high or low. He called this a lapse, so we will use that term. On an intraday chart, a lapse looks like this.

On the lapse chart we can see the market opened down, but not below the previous day’s low (as indicated by the horizontal line).

The difference between a gap and a lapse is important. A gap is a different type of event than a lapse. A gap takes much more risk for traders to take price outside the previous day’s range. As a result, gaps are often driven by more powerful forces than lapses.

It is commonly said, as a rule, gaps, and lapses, get covered. What this means is, at some point, the market will go back over that area and fill it. Conventional wisdom says, more often than not, a small gap or lapse will be filled in relatively short order. Further, the conventional viewpoint says on the day, and often the very morning it occurs, a gap or lapse will tend to be filled. It is also maintained by the majority of traders out there that Gaps or lapses of large magnitude can “run” away and not be covered in the near term.

Some traders specialize in this area alone and only trade morning gaps and lapses. If they are to be successful at what they do, then the truth about gaps and lapses in general must be known. Let’s take a look (over the last two year period) and see if we can get to the bottom of this.

The graphic below shows the equity curve of a simple trading system using one Emini S&P contract. It buys down gaps and sells up gaps without regard to the magnitude of the gap. On an up gap, it will exit the short position if the gap closes to within the highest of the previous 5 (5 minute) bars from the previous day. If it fails to achieve this at any point during the day, it exits on the close. Similarly, for the down gap, it will exit the long position if the gap closes to within the lowest of the previous 5 (5 minute) bars from the previous day. If it fails to achieve this at any point during the day, it exits on the close.

As you can see from the graph, there were just over 90 occurrences in the last couple years of true gaps. The result of trading these according to conventional wisdom resulted in a loss. Over all, this system was 48% profitable. There were periods where doing the opposite could have been very profitable and periods where conventional wisdom held. As a general rule, for gaps then, we have a pretty much random result.

Let’s look at the case for Lapse conditions. The rules are the same as noted above for gaps. Trades are only allowed at or before 935AM Eastern time.

We can see there were about 140 cases of lapses in about the last two years. The result of trading according to conventional wisdom would have taken us on a wild ride indeed. During the period covering somewhere about the first year, it would have lost around $8000, and during the most recent year it would have made around $5,000. This would only be true if you had been smart enough to switch strategies at exactly the right time. Not a very likely sequence of events. This test also came up at about 48% accurate, again showing this approach to be more or less random.

What if we were to parse out the gaps according to certain magnitudes and trading only the smaller gaps or lapses?

As can be seen from the above optimization grid (compliments of TradeStation), the test for only trading smaller gaps did not pan out. Some were profitable and some were not, with only 3 out of 19 tests being profitable. This again confirms, over the last two years, gaps are more likely to run than cover. Are bigger gaps more likely to run than smaller ones? The data suggests a gap greater than 9 points may be more likely to run than gaps less than 9 points, however, the distribution of returns above that point does not increase with increased gap size. Therefore, this conventional wisdom is only partially true, if at all.

Does this article claim the trading of gaps to be of no value? Absolutely not. The trading of gaps can certainly be viable if managed correctly. For example, our lapse equity curve shows a very strong linear relationship at various times. To improve upon this, one might research switching from one method to another under changing equity, or in any number of other ways. One example that could be extracted is the case for trading gaps that are more than about ½% as runaway gaps.

With a little creative thought and a couple simple research techniques such as those shown above, one could find plenty of trading opportunity in this exciting area of gap/lapse trading.

If you are a swing trader, it is of paramount importance you understand how gaps and lapses impact your trading. Typically this will impact you on entries and on overnight moves. If you are entering short, one of the best things that can happen to you is for the market to gap, or lapse up. The worst of course, is to enter short on a down gap/lapse. Because selling at a lower level increases risk on your position.

If you are already in a position, say long, and the market has a smaller magnitude gap or lapse against you, it is less likely an actionable event when compared to a case where you have a large magnitude gap going against you.

It is extremely important not to simply take conventional wisdom and act on it without first evaluating the turf on which you play. Doing so can cost you and can result in a disastrous trading record. Always research your method thoroughly before risking hard earned dollars, or enlist the help of a professional to achieve this goal.

10 AM Morning Update for 9/23/2008

Please be aware, without respect to the EMF forecast,
Price action at this time is bearish suggesting potential
downside movement.

** ALERT  **  Time= 1005: The current price action is bearish.
Short positions taken on upside rallies may be beneficial
between now and the close.

RESULTS: +33 points

September 16th, 2008. I don’t like to brag but lately too many traders have been getting hurt in the markets and I think it is unfortunate. Today for instance was one of the most volatile days I can remember - AIG opened below $2, a day after a 4% sell off, FED meeting, bankruptcies, well, you know the rest of the story.

As you know I trade all over the place, without stops, indicators or other clutter.

My only tools that are available to everyone are EminiForecaster.com G-lines and MarketDayTreaders.com G-signals - that’s it.

Having said that, today, I was able to outperform myself! When volatility kicks in I reduce the number of contracts I trade, sometimes down to only 1. This is good because I know I will get all the benefits (and risks) of a volatile day like today. Just look at today’s 5 minute chart and calculate an average bars’ range, some 20 months ago that was the range of an entire week!

Anyway I traded like a maniac trying to beat the signals using my intuition and experience. And here are the results:

- 10 round trip trades

- $4,500 or 90 ES points

- quit trading for the day at 3pm EST

- made about 33% on that particular account

Here is how G-Signals from MarketDayTraders.com performed today (with a 5 point stop) -

click here for more history charts

Not bad, as you can see I took advantage of some of the trades that were recommended -

To learn more about G-Signals go here http://MarketDayTraders.com

Images are copyrighted by TradeStation (TM)