Wednesday, December 13, 2006

Opening Gap Fade - Continental Airlines (NYSE:CAL) and NASDAQ 100 Trust Shares (ETF) (NASDAQ:QQQQ)

I shorted the Qs on the open because despite bullish retail sales there was nothing compelling enough in the news to push price beyond the intraday pivot point (black arrows on the chart). The entry was low risk because my stop was set just pennies above the pre-market high.

A few of you asked what conditions made me fade the Qs. The primary things that struck me this morning are outlined above. The pivot points are especially compelling and they are used by many floor traders (follow the herd). The rest is feel and that comes with experience.

I shorted CAL as soon as the third 5 minute bar took out the low of the second bar. I set my initial stop at $46.50 because I expected CAL to be much more volatile and because there is no real intraday resistance at the opening price level. The trade started out nicely, but shortly thereafter buyers stepped in and I felt I might me stopped out. Trading the open is extremely volatile, however, I had a strong conviction about my short and resisted tightening my stop. I covered 50% of my position when price tagged $45.00 for the second time, and moved my stop to breakeven. I was very happy to cover the balance at $44.25 and be done with this choppy ride.

These are 5 minute charts.

P.S. A broken tooth at breakfast and emergency dental appointment scheduled for 11:30 kept me from work this morning. It also meant that the usual gapper scans would not fit into my trading day very well. So maybe that's the real reason why I was so aggresive on the open today.

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