How To Use The $TICK To Fade Gaps

In the photographs above, you can clearly see the large gap in the

ES futures overnight, causing them to open sharply higher on Wednesday morning. In order for double digit gaps to 'hold' and continue higher, the cash market (the actual stocks in the S&P 500 Index has to trade very strong and also gap up in order for their "future value" (the futures) to be in line with the stock prices. The market internals such as $TICK clearly show us that although at the moment of open, the futures were pricing in much higher stock prices than Tuesday's close, in reality the stocks themselves that actually make up the index were not all moving up en masse. If they were, then there would have been a much stronger $TICK reading within the first few 5 minute bars. A good extra tip is to watch the high spike of the first 5 minute tick, if this number is less than 500 and the futures are gapping up sharply, they are pretty certain to fall soon.

Generally, you would need to see a strong $TICK spike up into the +1,000 area and preferably, the majority of the $TICK action above zero in order for the gap to sustain itself. When you see that the internals are actually divergent from what the futures are doing, you should be thinking of a fade (trading opposite the gap) and you should put your shopping list for swing trading longs back in your pocket for the time being, because you will probably get better prices a little later on.

As far as the broad market is concerned, same chop - different day. We are still maintaining inside of a tight range. Remember that as discussed in last nights report, whenever there are areas of consolidation, sharp movements always follow as pressure gets built up and then released. We still think that this release should be to the upside as the SPY is now trading well above its 200 day moving average. We'll continue to keep it close to the vest as usual.