Learn how to use the Gap Guides via this short video. View the gap zone map here. Learn about the First Hour Guides and view a video here.

Join Scott every Thursday at 9:00 am ET for live pre-market analysis of the opening gap: register here.

Read the newest "Member Spotlight: Andy from Illinois" -  a long time member of MTG who shares how he has generated significant profits over the past 12 months using the Gap Guides. 

Interested in membership, but have questions? Get them answered at this special webinar on Wednesday, January 11 - more info here.

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Pre-market comments: (posted for members at ~9:20 ET daily)

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Happy New Year!

As of 9:10 am ET, most indices are showing small to mid-sized gaps down in the D-L zone (below prior day lows)

Risk Factors

• Gap Guides:  most indices are showing weak win rates and mixed profit factors for gaps opening in the D-L zone today.
  

• Unique Day/ Patterns (with MTG stop parameters): 
  
  • Fading DOWN gaps after a 40 day high close: 103/167 (62%) and 1.0 PF
    • if prior day was NOT a 50 day high close: 7/13 wins (54%) and 1.0 Pf
  • Fading DOWN gaps after a 30 day high close: 17/30 wins (57%) and .9 PF
  • Fading DOWN gaps after a shooting star candlestick (open and close in bottom 35% of prior day range) when > 10 DMA: 7/16 wins (44%) and .6 PF
    

• Unique Day/ Patterns (with MTG stop parameters):
  
  • Fading small and mid-sized DOWN gaps (<40% of 5 day ATR) after closing 1% higher and > 10 DMA: 98/125 (78%) and 2.1 PF
    
    • And following unfilled up gap: 20/25 wins (80%) and 2.2 PF
      

Bottom Line:

There are some clear and compelling positives in play today, but there are clear risks too.  A speculative trade at the open to the long side targeting the extended target is a consideration, but I will wait for a more compelling setup. TRADE AT OWN RISK.

(Note: unless stated otherwise, all research data shown above is based on the S&P 500 (ES or INX) for the past 10 years, including commissions, but not slippage.)

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Results

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After the open, the markets traded sideways until the 10 am ET Factory Orders report. Seeing some positives among the market internals and no significant selling pressure, I went long with a small discretionary trade after the report was released and was filled at the S-1 pivot just above the opening price. I was stopped shortly thereafter for a 3 point loss as sellers drove prices down to the 1264 area (S-2). 

Though disappointing, it was much, much better than being long at the open on a gap fade and being stopped out  (note: my discretionary trades are much smaller than my gap trades).  And though it doesn't directly put money into the account, avoiding a losing gap fade like today, is always a good thing.

I then waited for the First Hour Guides to be posted. They showed mixed data for the high breakout/high fade and a slight edge for the low breakout.  I explained to the trading room that I was still bullish and expecting gap fill today, but the Guides for the low breakout for the S&P indices met my criteria and that the majority the other indices also favored the low breakout, so I HAD to take it, even though I did not like the setup at all.

Why? Well, per my pre-market comments there were some compelling bullish factors in play, namely the large unfilled up gap from yesterday and the significantly higher close. Plus it was the beginning of the month and only the 2nd trading day of the year - both historically bullish periods. But trading rules are NOT meant to be broken and as I explained, I'd rather be stopped out following my plan, than to avoid a loser by using discretion.

If you are new to trading, that statement may sound insane, but it is the only consistently reliable way a trader can measure and improve their setups over the long term. "Seat of the pants" decisions ultimately and ALWAYS lead to butt-ugly long term results (pardon the analogy).

As it turned out my concerns proved valid, and after the ES traded about half way to my target, it reversed and stopped me for -4 pts. It then continued higher and filled the gap before consolidating the rest of the day.

I then spent the afternoon in a doctor's office as he described the many ways he could slice and dice my back and maybe releive my chronic back pain. A fun day it was not, but a bad day as a trader, beats a good day in an office!

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Tip for Thursday

Historical results for the past 10 years when fading gaps (targeting gap fill) on the 5th calendar day of a month (using an end of day stop):

• Down gaps: 31/45 (69%) and 1.3 PF
  
• Up gaps: 17/31 wins (55%) and .4
  

Note: I will rerun these numbers using MTG stop parameters, as well as consider other unique patterns and charasterics of the current setup for our members in the morning.