Don’t Bite on the Head Fake

The opening of the market can be a crazy, anxiety-filled time. Many experts will tell you not to trade at the open, but that can be debated. Many times, especially in this market, there are sizable gaps higher or lower to start the session. If you are watching the underlying or have an already-established position, your pulse may race and many times there is an instinct to do something right there and then. But knowing not to get fooled into early market action can improve your chances for success many times over as a technical analyst.

Example: Gap Lower at the Open

Let’s look at a recent example of the market gapping lower and looking like it would move even lower right after the open. Below is a recent chart of Micron Technology Inc. (MU) on a 15-minute time frame. The stock gapped down to start the session (where the rec box is). The key is that it gapped down to a potential horizontal support level around $72.50. This is where timing becomes important.

head fake
Head Fake to the Downside

The market and stock had moved higher the previous couple of sessions and then gapped lower to start this particular day. If a bearish base forms after a few minutes, I like to see if I can get a 2-bar close (2 consecutive bearish closes) below the support level formed from the base. As you can see in the chart, it looked like it was going to move lower but then failed to do so. In this case, the stock ultimately moved higher the rest of the session. The head fake to the downside might have suckered you into a bearish position if you had not been patient.

Even though I am not a big believer that all gaps fill, in this case it practically did. The key to this whole chart was that potential support level having a better chance to hold, which it did, than to move lower. The stock rallied big, too.

Experience Counts

Based on the experiences of myself and countless other traders who use technical analysis, too many of us rush to judgment and chase stocks right after the open, especially if there is a move through support or resistance. Of course, sometimes the stock does keep moving in the same direction, but many more times support and resistance levels hold. Traders need to slow their roll at times. It just may stop you from becoming a victim of the head fake.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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