Wednesday's E-mini S&P Futures Gap Chart:

GAP: up 8.75 pts

ZONE: D-3

ACTION: short full size at open; filled at 815.25

HEAT:  5.25 pts

RESULT:  +8.0 pts (scaled out: +7.5 (80%) and +9.25 (10%) and +10.75 pts (10%))

TIME IN TRADE:  1 hr, 55 minutes

COMMENTS:   This morning's pre-market comments summed up my views of this setup well:

"Nice looking D-3 gap and signal this morning from Otis. Seasonality is very positive too. And, per Gap Facts database, D-3s that follow wide range days like yesterday have a very high win rate.

Risks include the extreme oversold conditions and some bullish divergences that are starting to appear as well as the psychological impact of 800 being tested yesterday. Could have some short covering after the open that will need to be endured... that said, all else looks good and all trades have risks. The probabilities favor this play, so I will be shorting with a full size position at the open"

As I reminded folks in the Trading Room, my nickname for this signal is the "Cowboy."  Per the glossary, "I call it this because it often bucks up and down like a wild bronco and it pays to hold on and ride it like a cowboy. If successful, it will often sell off through the prior day close and deliver a nice profit."

Sure enough, after a quarter size gap fill, prices reversed and traded up and tested the Globex highs (around 818) and then some.   Prices bucked above the opening price for what seemed like an eternity, but finally broke the uptrend and below the open.  Otis' first target was hit fairly easily and I opted to hold 20% for potential further selling, but knowing that conditions were ripe for a hard bounce, I ended up closing the rest of the position for an average of 10 pts. 

Prices sold off a little further before reversing impressively at 800.5 and finishing the day around yesterday's highs.

I spoke with several of you today that admitted that you were scared out of this trade when prices traded above the open and Globex highs. The best advice I can give you is to commit to your plan prior to entering the trade and be willing to accept, and even expect, the consequences of a full loser.  It isn't easy, but holding on and letting the historical probabilities play out over the course of the day is the key in my opinion.

To help you remember what to do the next time we get a "Cowboy" signal, check out this video (turn up your audio).

Tuesday's E-mini S&P Futures Gap Chart:

GAP: up 13.25 pts

ZONE: D-3

ACTION:  short at open, half size, filled at 829.5

RESULT:  +10.75 pts ($537.5 per contract)

HEAT:  1.25 pts

TIME IN TRADE:  29 minutes

COMMENTS:  My pre-market comments were prophetic:  "Up gaps during extremely weak markets like this one are always tricky, so trade at own risk and use your own judgement as always."

Why did I anticipate that this one might be "tricky?"  Two reasons:  shorting "up" gaps during extremely weak market conditions has the single lowest historical gap fade win rate.  For more info, see the most recent post regarding "the market's mood" at www.thegapguy.com.  Further, per the Gap Facts Database (available only to full members), D-3 gaps, which are normally prone to selling through the gap fill area, are less likely to do so when following a wide range day like yesterday. Throw in the fact that price was opening around the 50% Fibonacci retrace area of last week's monster move up, and the current volatile conditions, and I knew that this one may be a little more unpredictable than most.  A half size position seemed prudent.

After the open, I explained to the trading room that market intenals (TICK, TRIN, breadth, etc) were all somewhat bullish. This further confirmed that I needed to be on the watch for a potential reversal at or just above the gap fill area.  Knowing this, I also reminded them that my rules allow for a discretionary exit if price comes within 1 pt of my target.

Sure enough, just before 10 am ET, prices probed the 818 area (1 pt above target) for the 2nd time.  Seeing prices struggled in the 818 area again (forming a potential double bottom), a quiet pit, improving internals and knowing that "buyers were in the house" (thanks to Ben at www.tradersaudio.com) and sitting on over 10 points of profit, I closed the entire trade using a market order.  No need to be a "dick for a tick" (pardon my French).

Note:  As part of my gap trading plan, I have a standing rule that allows me to use discretion to exit if prices come within 1 point of my target. I generally do this only if I have a sizeable winner and market internals and price action are showing that a bounce is likely.  Often this rule costs me a little money (like the last time I used it which was on November 21 - see that gap wrap post). Today, however, it allowed me to catch a nice winner in which Otis was stopped.

If you were disciplined and stuck with Otis' parameters and was stopped in the process, try not to be too upset (easier said than done I know!).  Gap trading is a long term process, not a discreet event.  It all evens out in the long run. The key is to have your own plan and your own rules and stick to them.

Friday's E-mini S&P Futures Gap Chart:

GAP: up 20.25 pts

ZONE:  D-3

ACTION:  short, quarter size, filled at 770.0

RESULT:  +16.0 pts ($800 per contract)

TIME IN TRADE:  58 minutes

COMMENTS:  Considering Thursday's nasty wide-range day sell-off and supportive seasonality for shorting gaps this time of the month, I was excited about this D-3 Cowboy signal from Otis.  However, I was also very concerned by the extreme volatility of the week and the fact that it was Options Expiration (though the latter actually has a very good record for shorting "up" gaps per the Gap Facts Database).  With a 40 point range during the Globex session and having to leave for a presentation shortly after the open, I decided that a 1/4 quarter size position was the reasonable thing to do.

After the open prices bounced around quite a bit before selling off to the 754 area where buyers showed up. With Otis' target just 3 points below, I decided that it was prudent to sell about 1/3 of my position and lock in 16 pts, so that no matter what happened, I was assured of at least a scratch trade worst case (since my stop was 8 pts on the remainder).  A little bit later prices sold off further and came within 1 pt of my target at 751.25. Per my rules, I am allowed to close my position if comes this close to my target.  Happy to lock in a big winner before I took off for my presentation, I closed the entire position as prices bounced back up to 754.  As usual, Otis stayed the course and nailed it for +18.75 pts. 

I've had some questions regarding position sizing during these volatile times.  My current plan is to stick with half size positions (or less) until either: a) volatility dampens to and remains less than 50 on the five day ATR, -or- b) I gather enough data to confirm Otis' performance during the extremely volatile periods.  So far, he is performing well and I am leaving quite a bit on the table. But I'd rather regret my lost profits from trading conservatively, than regret my losses from too aggressively trading during these history-making times.

Thursday's E-mini S&P Futures Gap Chart:

GAP: down 4.25 pts

ZONE: D-2

ACTION: long at the open - half size; filled at 901.25 with extended target (above gap fill)

Heat: 1.75pts

RESULTS: 6.0 pts (+$300) per contract

TIME IN TRADE: 6 minutes

COMMENTS: As I was preparing for my long weekend Wednesday night, I debated whether to trade the open on Thursday morning or not since I would be travelling and was unsure whether I would have reliable Internet access.  Knowing that the name of the game is to attempt to catch every signal from Otis so that the long term probabilities work for my advantage and not wanting to be "preaching out of one side of my mouth, yet doing another," I opted to suck it up and follow my plan by trading the open on Thursday - even if I had to call in my orders to my broker.

Around 9:15 am ET we pulled off I-95 in Emporia, Virginia and found a Shell gas station with a Starbucks beside it that had wireless Internet much to my surprise and delight. I turned on my laptop and got connected and checked in with the Trading Room. At 9:25 prices were trading just inside Otis' go/no area for a long signal, so we had a play. Due to volatility (man I am tired of saying that), I traded half size.

A strong pop into the open resulted in me getting a terribly disappointing fill - a point above the actual open AND about 3 points above the 9:25 price.   But price action held, though it was very choppy.  A nice run up resulted in my extended target being hit for +6.0 pts about 5 minutes after the open.  All from the front seat of my father's SUV at a country gas station.  You gotta love that.

Note: It appears that I made a mistake in my rush Wednesday night. I accidentally used the settlement price of 903.75 and not the actual last trade of the day (which was 904.5) to calculate Otis' Gap Play table and create the Gap Map. Since my extended target was based upon the close, this "small error" cost me and those that followed along: .75 points. Sorry about that folks.