When there is this type of overreaction, there is a reasonable probability of a move back to satisfy the OOPS. The system is programmed to create more profits than losses. When the market opens lower than the previous day’s low, a trader can place a buy-stop order at the previous day’s low price. When the market opens higher than the previous day’s high, a sell-stop order can be placed at the previous day’s high.
Most traders recognize that gaps from one day’s close to the next day’s open occur for any number of reasons: news, rumor, , etc. However, the move often exaggerates the impact of news. You see this all the time with surprises. A big gap in the price (upward for positive surprises, downward for negative) is next offset with a move back to the previous trading level. This reversal is described as “satisfying the OOPS pattern”. Approximately 93% of the time, price will reverse to close the gap and satisfy the OOPS pattern.
For example, the chart for NASDAQ:AMZN demonstrates how surprises can create an OOPS pattern, followed by retracement.
The circled sections reflect price behavior after surprises. In end January, a positive report led to a large price gap moving about 180 points higher. The price also moved from trading at the lower to moving above the upper . It continued walking along the resistance until moving lower and retracing back to satisfy the gap in price, the OOPS pattern.
The second example was just as dramatic, but less obvious. Upon a negative report being published, price fell about 130 points. But it recovered quickly, recovering all of the lost ground in about two weeks.
The OOPS pattern is one form of retracement timing, allowing a swing trader to exploit market behavior. This also points to the maximum timing for leverage through opening of options trades. At such moments, single long calls or puts are likely to perform better than elsewhere on the chart. Short options may also be used as long as the price move is dramatic enough, and confirmed by other signals, to raise confidence as high as possible. To hedge risks, traders may also exploit the OOPS pattern with vertical spreads, synthetic stock positions, or collars.