Moving Forward: A Balanced Approach to Gaps

Hello, my friends!

The markets kicked off with an aggressive surge this morning, with all major indices gapping up into the New York session.

However, here’s the key takeaway - this wasn’t just any move; it was a classic case of market imbalance.

Why does this matter for intraday traders? Because when volatility spikes like this, we’re staring down two powerful possibilities: either a strong continuation to the upside or a sharp gap fill back down.

Let’s dive into a live lesson and break it down!

Lessons from the Trenches 📚

In the world of day trading, pre-market gaps are both a mystery and a lucrative opportunity. For many traders, gaps - whether up or down - are moments of intrigue that can set the tone for the day’s trading. But they can also raise questions:

Why do they happen?

What do they signal about market sentiment?

Most importantly, how can traders capitalize on them?

To understand the significance of pre-market gaps and how they affect trading decisions, we need to take a deeper look at the data, and how you can use these insights to develop a successful gap-fill bias.

These gaps can be influenced by several factors, such as overnight news releases, global market activity, and algorithm-driven strategies that often place large trades in low volume periods

One of the most common strategies around pre-market gaps is known as the gap-fill strategy—the idea that gaps are often “filled” or retraced back to the previous day’s closing price. This happens for several reasons:

1. Profit-taking: After an overnight gap, traders who participated in the pre-market rally or sell-off may take profits when regular trading hours begin

2. Overreaction: Gaps are sometimes the result of an overreaction to news or data. — As example on todays overreaction of Tech Stock Rally

3. Lack of follow-through: Pre-market gaps can occur in thinly traded markets, where a lack of liquidity allows price to jump or fall quickly.

But how often do gaps actually get filled?

Studies have shown that 70% to 80% of all gaps are eventually filled - particularly with SPY.

Given that a large percentage of gaps do fill, traders have developed several strategies to capitalize on this tendency. Below are a few key approaches:

1. Wait for the First 30 Minutes: The first 30 minutes of regular trading can be highly volatile as pre-market orders get processed and institutional accounts take positions.

2. Use Volume as a Confirmation Tool: Volume can be a powerful indicator of whether a gap will fill. Low pre-market volume followed by a surge in volume during regular trading hours can signal that the initial gap was an overreaction and is likely to fill. Conversely, if volume continues to rise in the direction of the gap, it may signal a trend continuation.

3. Monitor 0DTE Levels: 0DTE options are highly sensitive to volatility. A sudden move in SPY can cause a dramatic shift in the option's value. The goal is to spot a correlation between the highest exposed region with the opening of the gap.

Pre-market gaps can seem intimidating or unpredictable, BUT with the right data and mindset, they present excellent opportunities.

NY Impulse - SPY (0.71%)🗽📉

9:30-12:00 Est

• SPY opened today at what we refer to at MenthorQ as the 1 Day Max - an area if the asset class reaches, its considered over-stretched in extreme territory

• The market was primed for a decisive move. And that’s exactly what happened!

• After a gap-up on low volume, we saw a strong rejection that sent SPY right back down to the critical 0DTE level of the day at 571.

  • What makes this area so significant? It’s precisely where the pre-market gap up started, creating a pivotal moment for intraday traders.

• SPY 574.78 (1 Day Max)

• SPY 571 (0DTE Highest Level of Call Gamma)

• SPY 570 (0DTE Positive/Negative Shift)

0DTE Levels: Zones of significant options volume in underlying assets, that can trigger an increase of volatility as the expiration approaches

These market levels are recalculated and updated daily, taking into account factors like gamma expiration, trading volume, and market volatility.

Coverage include Stocks, ETFs, Indices, Futures, and Crypto. For the most up-to-date levels and analysis, all information is available on MenthorQ.

SPY Headlines 📰

• U.S. Weekly Jobless Claims Decline; Q2 GDP Remains Unchanged

• Accenture Rises on Positive Revenue Outlook for the Year

• Mining Stocks Surge on Reports of Chinese Economic Stimulus

• Markets Climb: Dow Gains 0.62%, S&P 500 Up 0.4%, Nasdaq Increases 0.6%"

• Greed increased to 72

Closing Mindset 🧠

The market moves like clockwork, and following it level by level is essential.

Keeping it simple and disciplined helps maintain a clear mindset—and that’s the key to thriving in this volatility.

In both unpredictable markets and life’s unexpected events, maintaining mental clarity isn’t just an advantage - it’s a necessity for thriving.

Until next time,
Steve B
Founder, The Daily Impulse

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Important Disclaimer:

This newsletter is for educational purposes only and does not offer financial or investment advice. It should not be taken as a recommendation to trade assets or make any financial decisions. Please be cautious and ensure you conduct thorough research or consult with a financial professional before making any investment choices.