My pre-market comments:

"As of 9:10 AM EDT, most indices are showing small gaps up in the U-HC zones.

Risk Factors

• Possible Opening Risks:  if markets rally into the bell, opening above R1 (1096 in ES) is a risk factor
• Special Day: Thursday of Options Expiration weak is historically weak for fading DOWN  gaps WHEN BELOW 200 DMA: 22/42 and .7 PF.  (but ok for UP gaps - see below)
• Gap Size: small gaps increase execution risks and impact of possible slippage and risk of mixed opening directions
  

Supporting Factors

• Gap Guides: like yesterday, if gapping UP, most indices show very good setups today in the U-H and U-HC zones, and if DOWN in the U-CO zone, the Gap Guides show OK win rates and profit factors for most indices
• Special Day: Thursday of Options Expiration is historically supportive for fading UP gaps: 45/58 wins and 2.4 PF using MTG stops (and is good below 200 DMA too). 
  
• Supportive Patterns:   multiple successive higher daily closes is a positive for gapping up
  

Bottom Line:

Thursday's setups look good for a gap up and OK for a gap down (if opening in the U-CO zone), extended target looks promising for a gap up, but watch out for mixed opening directions."

Gap Wrap

I was all set to pull the trigger on a gap up, but the pre-market bullish activity waned into the opening bell, leaving the markets with tiny gaps and mixed opening directions. 

Often I will short even a 1 tick gap up if the probabilities for the extended target are high like they were today. But, as I mentioned in yesterday's post, I will only do this IF all the indices are gapping in the same direction.  The reason is that I don't want the markets gapping in opposite direction of my trade to start filling and put counter-pressure on my trade. 

By the opening bell, the NQ was down and others were on the fringe, so I passed. The markets continued selling off after the open hitting the extended target and beyond.

Though disappointing, lucrative-looking gap setups like today's have often disappeared by the open for as long as I've been trading gaps. Some of our members will (and did) fade the gap by entering prior to the open if the Gap Guides show compelling setups in all potential opening zones. That was the case today.  This is a valid approach, but there are additional risks including lower liquidity and risk that you will get filled at a worse price than you would have otherwise. Further, some members always wait at least 2 minutes - some 5 or more - to gather more market information before fading the gap.  These folks often have higher win rates and bigger win/loss ratios.  But they miss alot of the easiest and fastest winners too.

The bottom line: there are many ways to trade gaps and you can be very successful with any of them. The key is to pick the approach that fits your skill level and goals the best, and then simply recognize that all approaches have their pros and cons. 

Have a great day!

Scott