Hi everyone! Let’s look at charts for DIA, SPY, and QQQ.
If you prefer trading with the trend, it’s probably a better idea to wait for a pullback in the indexes, then go long for a better risk reward ratio. If you are aggressive, you may decide to short DIA with a target of about 251-253, and a stop loss near 262.
The SPY, which tracks the S&P500, also has the same gap as DIA. Staying long here in the short term doesn’t make much sense, so I recommend either selling now and waiting to buy on a dip, or going short here.
I originally mentioned that QQQ would be the top choice to short, but now it looks much stronger than the other indexes. I’m neutral on the index with a slight lean towards being bearish still. However, I would short DIA or SPY instead of QQQ at this point.
2 thoughts on “9/3/2018 Indexes move mostly sideways this week. I still prefer staying out of the market or being short here.”
Thanks for your detailed analysis. I learn a lot from your posts.
Could you help me understand why mostly gaps get filled? I would appreciate if you could shed some light on the psychological reason behind it.
LikeLiked by 1 person
Hi Vamsu! Thanks for the kind words.
The psychological reason behind gaps being filled is due to something called “mean reversion.” Since price moves according to supply and demand, eventually, price will revert back to the “mean” or average price where supply and demand are equal again. This tends to show up as a gap being filled.
Also, another reason is due to traders that just want to break even. Let’s say a trader buys Apple stock right before earnings, hoping to make some quick money and sell right after a good earnings report. Unfortunately, Apple gaps down the next morning after bad news, and drops from 150 to 120. This trader is now down 30 dollars a share. The trader promises that once Apple goes back to his buy price of 150 (top of the gap on the price chart), he will sell. This trader doesn’t want to sell his Apple position until it is at least break even, and once Apple fills that gap, he sells (among many others). Since many traders are trapped below their buy price and refuse to sell, there are now more buyers than sellers. This forces the price to fill the gap since there is more demand than supply.
I hope I answered your question, and please feel free to ask more questions if my explanation wasn’t clear! Have a great day!