Gap Trading C - February 23, 2009

Today was a good example of Gap Trading C (Citigroup), due to a news release that came out prior to the opening of trading.

The news that came out was that Citigroup was negotiating to increase the U.S. Goverment's ownership in the company to as much as 40%. This was initially reported in a Wall Street Journal article.

In this case, Citigroup's stock has been trending lower for several months and any news thought to be a positive would surely provide a boost higher, at least temporarily.

Typically, an opening Gap will occur due to a news release and therefore can also be part of a News Trading Strategy.

One of the tricks to determining whether or not to buy a gap higher and take a long position, or short into a gap higher expecting the gap to fade, is to have some sort of knowledge about the company you are thinking about trading before the gap occurs.

In this particular case, if you had been following Citigroup's stock recently, you would have known that there has been a fear of Nationalzation of Banking companies circulating. As recent as last week, banking stocks were moving lower because of this fear.

So if Citigroup's stock opens higher because of news that the U.S. government may be increasing it's stake up to 40%, why would the stock continue trading higher after the initial opening gap? A relief rally based on less uncertainty maybe? This is the same fear that was causing the stock to move lower just last week.

This is only one view of course, and there are many things to consider, but this would have been one way to take on a short position as the stock gapped higher at the open today.

Here is a chart of what has happened so far as I started writing this article. It shows the priors day's price action and the current early morning gap open higher. I will post an end of day chart later on to see what the rest of the day brought for Citigroup. Whatever happens though, a situation like this will often produce at least a short term trading opportunity. The following is a 2 day chart:

Gap Trading -C

Here is an intraday chart showing the early morning price action only, including pre-market trading:

Gap Trading -C

This is a 2 day chart again, this time showing what happened throughout the rest of the day after the initial gap open higher today.

Gap Trading -C

You can see that after the initial gap open higher to around $2.40, the stock declined and leveled off when it got to the $2.05-$2.10 price level. This also happened to be a short term upper resistance level from the day before.

Then, after moving sideways for most of the day, the stock again moved higher and spiked through the opening $2.40 price level, but only went up to the Pre-market and prior day's Pre-market high. It then reversed again and continued to decline into the close towards the low of the regular trading hours session.

There will likely be more banking news the rest of the week so there is no telling which way this will go from here. So by looking at the above information you can see that an opening gap higher will sometimes reverse at a resistance level and provide a good intraday shorting opportunity.

Remember, if you are trying to trade a gap, when the trade is over get out and move on. Don't stay in the trade once your trading rules say to get out. And don't be greedy and keep trading over and over throughout the day after the gap trade is finished.

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