Today we are going to look at some "extremes" that occur to a stock. One is the extreme of being overbought" and one of course would be "oversold." Both give you a chance to capitalize on them if you know what to look for.

Even during the course of a single trading day, a stock can display a various amount of "technical" indications. At the open a stock may surge forward and almost instantly the indicators will start to show that it is "too far too fast" and the stock will pull back. Then after selling off those same indicators (and by indicators I am taking primarily about the MACD and stochastics lines) will show that the selling was overdone and it should start to rebound. Now I realize that a lot of you are holders of slightly longer duration, but those same indicators usually work on a weekly basis as well. But if you are into day trading..you can make some pretty good money following the "track" of a stock during its normal course. Lets start with a gap opening ...

If a company reports some type of great news, chances are pretty good that the morning will bring an open that is considerably higher than where the stock closed, and that is our classic "gap" opening. The fun part is that most gaps "close" sometime during the morning of trading. What is that you say?? Yes, historically, unless we are talking about the highest of flyers (like Iinternet stocks) a stock that gaps up a point or two at the open will sometime during that day pull back to almost where it closed the day before. It doesn't always make it all the way back, but it is very safe to assume at least 50% of the gap will be lost.

Can you see the opportunity here? It is called "shorting the gap" and some very big moneyis made doing it. You see what happens is that when a stock "gaps" open,more times than not it means the market makers are 1) either short the stock from the previous day and need to replace it, or 2) they cranked up the price on the news release knowing a ton of people will buy into it, and then immediately they pull it back leaving those pre-market order makers feeling pretty bad! Since we know that the percentages is very high that the gap will not be sustained, it is often wise to short that gap at what you feel to be its highest price. How do you know when this is?

Technically you cannot, but you can watch it pretty well on a NASDAQ Level 2 screen. For instance, let us assume that the XYZ company released news of a new product last night. We look tomorrow and see it is opening two points higher than it closed. If you watch the first few minutes of trading often you will see a pattern like this: first it sells off a bit (about 1/2) and then rallies strong again, maybe even picking up a whole point. But then you see it start to fade and that is usually the signal that it about to sink hard. Placing a short sale order at that point is often a winning trade as the gap erodes, and soon you can cover that short sale with a very nice profit.

Try doing this on paper for a while and see if you can become good at it before you try it for real, but I think you will be surprised at the amount of times that you will make a winning trade.

Are there times not to try this? Absolutely. I refuse to try gap shorting Internet stocks when they are really hot, and I don't like to short a technology stock that announced it has beaten estimates because too many times an upgrade is right behind it! But for the bulk of the market, shorting the gap is usually a profitable experience.

And remember this well: If the overall market tone stinks gaps will close even harder and faster. For instance, lets suppose the same example above was released on a day when the DOW loses 50 points in the first 15 minutes. Chances are that two-point gap is already gone!

So do you homework and try a few paper trades trying this tactic. Just remember that if you are wrong you must buy your short sale back at a higher price, and that if you are right, do not get greedy! Rarely will a gap opening fall much below the previous days close, so if you get close to the previous day closing price,.cover your short and move on! Many times the stock will rebound and rally strongly once that gap has been pulled back.