June 29, 2017

Gap Fade Trade and Much More

Gap Fade Strategy

The market gapped sharply higher today and as a result a Gap Fade strategy signal occurred. The Nasdaq 100 (QQQQ) opened at $44.45, or $.43 higher than Monday’s high of $43.10 (reference graph below).

april-1-2008-gap-fade-trade.png

 As a result I placed the following trade shortly after the open.

  • Buy to open QQQQ May08 45 puts (QQQQS) for a limit price of $1.92.

I did have concerns about the potential of a gap fill (mentioned in the premarket comments on the Insiders page) today. Typically the first few days, especially the first day of the month are seasonally bullish. However, the large gap to the upside today pushed the underlying QQQQ into an overbought state and just under what looked like fairly strong overhead resistance. The risk/reward with such a large gap was favorable so I decided to place the trade. Over the past several months this type of set up led to quite a few profitable opportunities and historically a short-term fade is what often occurs at this juncture.

Shortly after I placed the trade QQQQ began to move higher, pushing ever closer to my stop-loss. Approximately 90 minutes later my stop-loss was hit so I decided to call it quits on this trade.

As always I sent a real-time trade alert to Gap Fade subscribers to sell the May08 45 puts.

  • Sell to close May08 45 puts (QQQQS) for $1.60

The loss was $.32, or 16.7%. It was the first loss since the inception of the Gap Fade strategy on 2/1/08. Even with the loss the strategy is still well higher than all of the major benchmarks (S&P, Dow, etc.) up 6.4% since it was initiated roughly two months ago.

The one positive about today is that it displays how I handle losses in the Gap Fade strategy. I want to keep the loss between $.20 to $.35 for each option trade. By limiting my losses I allow statistics (and probability) to work in my favor. This takes all emotions out the strategy which is just how I like it.

I must reiterate that the Gap Fade strategy seeks to achieve small steady gains over the long-term. There are going to be times when I have a losing trade. This is a fact that must be expected and acceptable with any trading strategy.

Here is the key: remain steadfast with your trading guidelines and money management techniques. Keep it simple and allow the strategy to succeed.

Market Review

The upside gap pushed three of the four major indices into an overbought state. Moreover, 7 out of the 16 sectors I follow (Insiders only) have pushed into an overbought state with the most notable being Biotech (IBB) and Utilities (XLU).  In the premarket report (Insiders Only) I will discuss this further by discussing potential short-term trades.

The ETF Extremes strategy has also moved closer to a signal. It has been months since our last trade. While it has kept us out of basically the entire bear market, it has also kept us out of very good short-term opportunities. I have remained very, very, very (I could on) patient with this strategy. It takes advantage of extremes in the major indices (much like our new PaperTrade Sector Extremes strategy). It is hard to stray from a strategy that has witnessed gains in excess of 113% since its inception approximately 2 years ago. Most don’t have the patience for this type of strategy. If it was your only trading strategy I could see the reasoning, especially if you are an income trader, but I am not. I present options strategies for the long-term. If you want more action then maybe diversification of strategies is an possibility. I for one could care less about so-called action. All I care about is long-term results. Remember, this is a marathon and not a sprint.

Overbought/Oversold for April 1, 2008

Major Benchmarks

  • Dow (DIA) – 70.5 (overbought)
  • S&P (SPY) – 71.7 (overbought)
  • Russell 2000 (IWM) – 69.6 (neutral)
  • Nasdaq 100 (QQQQ) – 73.4 (overbought)
  • Emerging Markets (EEM) – 72.4 (overbought)

more overbought/oversold levels on additional sectors found in the Insider’s page (Buy the White Paper and receive Two Months of the Insiders Page Free) – less than $1 a day.We work hard to bring you our latest views, opinions and research on a daily basis. If you are a loyal reader and find our thoughts useful please show us your support by joining our newsletter service.

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