This thread is to discuss the difference between trading in the 'morning session' after a significant gap versus a more 'normal' opening price. This is a very important concept.
I post this in the market profile forum because Market Profilers such as Dalton discuss the open with certain desriptions (from
Mind Over Markets text):
1. Open Auction In Range -- within previous days high and low
subset to #1:
open 'in balance' -- in the accepted value range of the previous day
open 'out of balance' -- open signifcantly away from the previous day closing price but within yesterdays range
2. Open Auction Out of Range -- the mere fact that the market has opened outside of previous days high or low tells you that short-term traders are not the ones moving the market. this is a market that will be highly emotional. some investors will have made or lost a lot of money and emotional trading will exist as those with big shorts on a gap down could cover/get squeezed and those with big losses could panic.
Linda Rashke uses a 4-pt rule. If S&P futures open is more than 4 pts away from the previous days close -- this is considered a significant gap. note that the last 2 days have seen gaps that are MULTIPLES of this standard rule. It is time to be careful. One standard rule is that expect markets to 'spike' on emotional trading. One interpretation of this is to be careful on 'retracement trades' after a big gap. A retracement trade is a 'pulllback' after a large spike. The market could easily spike in 2-way action and form bull and/or bear 'traps' -- when it breaks (with strong momentum) one way that is a fake before a large move the other way...