Mean Reversion — Gap Fades scans.

Gap fades and mean reversion look for a liquid stock stretched far from VWAP or its moving averages, often after a gap with no clear news or earnings. Traders watch for a push losing volume or rejecting a level, or price moving toward an old unfilled gap. A catalyst can keep a move going, so this is a risky counter-trend approach.

How the setup works

Prices tend to drift back toward their averages after an extreme move, especially when nothing new supports that move. A gap up with no news, on a stock with no reason to be repriced, often gives back part of the gap as early buyers take profits. Old gaps on the chart act like magnets too: price tends to revisit them.

A fade needs signs that the move is tiring: a push to a new high on less volume, a rejection at a level such as the prior day's high, or price losing VWAP after the open. The target is usually the gap fill or VWAP. The stop goes above the high of the move, and it is not optional.

Scans to try

• Gap Fade♥ lists today's gappers already losing the gap; Gap Fill♥ tracks names being bought back toward the open gap.
• Falling Into Gap♥ and Old Gap Fill♥ cover the magnets: price sliding into an old gap below, or working back up into one above.
• The has-news flag is the most important fade filter: it splits catalyst gaps from air gaps. Earnings flags keep report gaps, the ones that run, out of the fade list.
• Check the RS columns before treating a strong stock as a fade candidate.
• Gap size, RVOL and distance-from-average columns put numbers on "stretched".

A ZenBot workflow

1. After the open, run Gap Fade♥ for gappers already losing ground.
2. Remove anything with news or earnings: catalyst gaps are the ones that keep running.
3. Check the RS columns. A stock strong against SPY is a poor fade.
4. For bounce trades, use Gap Fill♥ and Old Gap Fill♥ to find prices working toward open gaps.
5. Set alerts on the scan, then wait for the rejection rather than shorting the open.

What to watch for

Fading means trading against momentum, and a strong stock can run much further than seems reasonable. Short squeezes hit hardest in low-float names. Keep size small, honor the stop above the high, and skip fades when the whole market is trending hard in the gap's direction.