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Make This Trade This Morning and Profit By This Afternoon

By Jeff Clark
Thursday, December 9, 2010

Large gaps higher have traded in a predictable pattern this year. Learn to trade them the right way and you can earn consistent profits day trading them.
If the overnight gains in the S&P futures market hold up into this morning, stocks are going to gap sharply higher. Here's how to day trade it…
Watch the action during the first hour and note where the S&P 500 is trading at the end of it. If the index ends the first hour near its highs, the odds favor continued strength throughout the day and a final push higher into the close. The best strategy here is to use any small two- or three-point pullbacks in the S&P 500 as opportunities to add exposure to S&P 500 exchange traded funds (ETFs).
On the other hand, if stocks don't end the first hour near the highs of the gap, the market usually gives up most of its gains by the end of the day. Your best trade here would be to sell short an S&P 500 index ETF or purchase one of the widely available inverse ETFs – which move in the opposite direction of the index.
Here's how it worked on Monday…
President Obama and the Republicans reached a deal to extend the Bush-era tax cuts for another two years, extend unemployment benefits, and temporarily reduce the payroll tax. The overnight futures market rallied on the news.
By the time Wall Street opened for business, the Dow Jones Industrial Average gapped up 90 points, and the S&P 500 gained 11 points and was trading at a new yearly high. At the end of the first hour, the gains had fallen back to 67 points for the Dow and six points for the S&P.
Since the market ended the first hour well below the early morning highs, it was a good bet the market would give up most of the rest of the gains by the day's end. Day traders could have purchased the ProShares UltraShort S&P 500 ETF (SDS) for $24.85 per share.
Sure enough, by the end of the day the market behaved predictably and gave up all of its gains. The Dow closed down three points and the S&P 500 was fractionally lower as well.
SDS, which trades inversely to the market, closed at $25.23. That's a gain of $0.38 per share, or roughly 1.5% – pretty good for a one-day trade that required only a little attention at the end of the first hour of trading, and a sell order at the end of the day.
Of course, day trading isn't for everyone. And not every trade works out successfully. But if you like the idea of making small gains on daily transactions a few times each week, look for predictable patterns like this one.
The gains can really add up.
Best regards and good trading,
Jeff Clark

Further Reading:

"Every morning, I wake up, turn on my computer for a few minutes, pocket a little cash, and call it a day. Often times, my workday ends by 10:30 a.m.," Jeff writes. "By day trading stocks and options, you can make as much money in just a few minutes as many hardworking folks make in a whole day." Learn more about the basics of Jeff's day trading strategies here and here.

In The Daily Crux
Market Notes
Big Treasury fund TLT breaks down to new six-month low… down almost 15% from August highs.
Oil service giant National Oilwell Varco up more than 60% in three months.
Home Depot and Lowe's break out to six-month highs… both up more than 10% so far in December.
Semiconductor leaders Analog Devices and Maxim Integrated jump to two-year highs.
Market Watch
Symbol Price
S&P 500 1228.28 +0.4% +12.5%
Oil 37.96 +0.4% +3.0%
Gold 134.79 -1.3% +21.5%
Silver 27.70 -1.4% +60.1%
US-Dollar 79.96 +0.4% +4.9%
Euro 1.33 0.0% -9.8%
Volatility 17.74 -1.4% -25.1%
Gold Stocks 563.51 -2.3% +27.7%
10-Year Yield 3.24 +2.5% -4.4%

World ETFs
Symbol Price
USA 123.28 +0.4% +12.5%
Canada 30.21 -0.7% +18.9%
Russia 21.85 -0.7% +21.4%
India 37.51 -1.7% +21.5%
Israel 16.84 -0.5% +12.1%
Japan 10.59 +0.3% +6.5%
Singapore 13.74 +0.6% +20.1%
Taiwan 14.81 -0.4% +19.2%
S. Korea 57.08 -0.5% +23.2%
S. Africa 71.34 +0.3% +30.5%
China 43.30 -1.6% -0.8%
Lat.America 52.25 -0.8% +9.1%

Sector ETFs
Symbol Price
Oil Service 135.21 +0.2% +21.5%
Big Pharma 64.01 -0.1% -1.9%
Internet 73.02 +0.2% +28.7%
Semis 16.43 +1.1% +28.1%
Utilities 30.87 -0.4% +0.3%
Defense 18.50 -0.3% +9.2%
Nanotech 10.10 -0.6% +1.1%
Alt. Energy 10.28 +0.8% -3.1%
Water 18.78 +0.1% +16.1%
Insurance 16.28 +0.9% +21.9%
Biotech 20.67 +0.1% +28.9%
Retail 19.49 -0.8% +27.1%
Software 24.98 +0.6% +26.4%
Big Tech 54.08 +0.4% +23.9%
Construction 13.31 +0.1% +17.8%
Media 13.80 +0.4% +23.8%
Consumer Svcs 67.39 -0.1% +24.1%
Financials 55.78 +1.5% +9.4%
Health Care 63.99 +0.2% +2.3%
Industrials 63.65 -0.2% +21.1%
Basic Mat 73.75 -1.1% +28.2%
Real Estate 54.70 -1.5% +23.3%
Transportation 91.23 -0.5% +24.8%
Telecom 22.68 0.0% +15.5%