Fannie Mae-No Politics (FNMA)

[armstka]

In light of recent events, I thought this might be a useful read for some. (actual charts aren't showing, but you'll get the picture) No, we can't always predict the future, but....


Professional vs. amateur gaps

When you are looking at gaps on a stock chart, the most important thing that you want to know is this:

Was this gap caused by the amateur traders buying or selling based on emotion?

Or...

Was this gap caused by the professional traders that do not make emotional decisions?

To figure this out you have to understand this one important concept first. Professional traders buy after a wave of selling has occurred. They sell after a wave of buying has occurred.

Amateur traders do the exact opposite! They see a stock advancing in price and are afraid that they will miss out on the move, so they pile in - just when the pro's are getting ready to sell.

Here is an example of a gap caused by amateur traders...

chart of an amateur gap
See how this stock gapped up after a wave of buying occurred? These amateur traders got emotionally involved in the stock. They piled in after an already extended move to the upside.

These traders eventually lost money as the stock sold off over the next few weeks. Notice how the stock eventually did go back up - but only after a wave of selling occurred (professional buying).

Here is another chart:

chart of amateur gap
See how this stock gapped down after a wave of selling occurred? These amateur traders got emotionally involved in the stock. They sold after an already extended move to the downside.

Ok, so let's break this down, shall we?

If a stock gaps up after a wave of buying has already occurred, these are amateurs buying the stock - look to short.
If a stock gaps down after a wave of selling has already occurred, these are amateurs selling the stock - look to go long.

These types of gap plays usually provide great opportunities because they represent and extreme price move.