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Market Gaps

At Trade With Precision, we are usually on the lookout for charts with optimal chart structure; those trends with steady buying or selling momentum. In other words no extremes of buying or selling as this can lead to erratic or uncertain price action (such as big wick candles) and price gaps.

When the markets opened this week after the much anticipated and closely monitored first round of the French Elections, many showed a weekend gap, meaning the opening price was significantly higher or lower than the closing price on Friday. When these gaps emerge, our chart structure is no longer optimal under our trading method.

Which raises the question, do we sit out until optimal chart structure returns or is it possible to find opportunities in markets with gaps? In situations like this, I look at the locations of strong support / resistance (S/R) levels, especially those on higher timeframes, in relation to the opening gap. For our first example, let’s take a look at the France 40 index.

The weekend gap has smashed up above the very strong S/R level of around 5,145. And as we can see from the monthly chart below, this level has been formed and retested numerous times in the past (depicted by the dashed magenta line).

Referring again to the daily chart above, we can see that if we add the Fibonacci retracement tool to the latest move on the daily chart, this strong S/R level also sits in the fib sweet spot, which is the area between the 50% and 61.8% retracement levels. If the market pulls back to test this level from above, it will also close most of this weekend gap and will be closer to the buy zone, which is the area between the 10 and 20 period moving averages. I’ll be looking for a small bullish rejection candle to join this bullish market in the direction of the overall trend.

Let’s take a look at another example. Below is the daily chart of the US Nasdaq 100 Index. In this case, we can see that prior to the weekend, the market had been consolidating below the level of around 5,455. The weekend gap has once again smashed through this strong resistance level, and the market has then continued up to an all-time high.

If we draw the Fibonacci tool on the latest move on the daily chart, we can see that the 50% retracement clusters with this strong S/R level. If the market pulls back to test this level from above, that will close most of the weekend gap and will also be closer to its buy zone.

In this case, I would be waiting for a trigger, in the form of a small bullish candle rejecting this clustering level, to enter this market.

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