GAP Trading Method
1. Dip, Pop and Pop
If the first move is a “dip,” I look for the first support level and go long. Remember, if a gainer is going to hold its strength, we won’t see much profit-taking at the open, and plenty of buyers will be lined up to carry the stock to higher highs. So the pullback should remain shallow, meaning I am looking for support to form at the very first level down.
Gainers are usually opening far above any pivots, so for support levels, I will be watching things such as the premarket low, any nearby whole numbers, moving averages and sometimes the previous day’s intraday high. If the gap is large, first support should come in well above the previous day’s closing price.
Once I see buyers coming in around first support and I enter a long position, I want to see a move up and over the open price — and a break above the premarket high — to confirm that the uptrend is continuing.
2. Pop and Pop
If the first move is a “pop” from open, I will wait for a pullback before going long, and I might even short the pop, depending on the size of the gap. The reason is a large gap, plus any early buying, creates a lot of incentive for profit-taking, so the first climb in that case will usually be more of a short-lived pop before a deeper pullback comes in.
or first resistance levels, I will be watching things such as the premarket high, any nearby whole numbers and any previous resistance levels on the daily chart that might be nearby. If I short that first resistance, though, I want to keep my target very conservative. Remember, if a gainer is going to hold its strength, we won’t see many people taking profits. So any short will be a small scalp against the trend, and I want to turn around and go long at the first bottom. The safest trades with the most potential will be with the trend.
From off that first top, the pullback should remain shallow if the uptrend is continuing, and it often bottoms at a higher low, near the open. The premarket low might also act as a support barrier. That bottom is your best long opportunity. The next climb should then hit higher highs. We need that higher high to confirm a continuation of the uptrend; otherwise, we could have a double top, which would be another short opportunity.
Now let me give you a couple of examples of these patterns in action, from news stocks this past week.
In April 25, we had plays on Amazon.com (AMZN - commentary - Cramer’s Take - Rating) and Biodelivery Sciences (BDSI - commentary - Cramer’s Take - Rating), among others.
If you look at Amazon, you see it opened with strong momentum at 53.12, up from 44.75, Tuesday’s closing price. Buyers stepped in almost immediately after the open, just below 53, and it “popped” to 54. From there it pulled back and, fitting with a “Pop and Pop” pattern, found support again just below 53, close to the opening price, before continuing the uptrend and breaking to higher highs. That successful retest of the 53 area was a great long opportunity.
With BDSI, too, buyers stepped in almost immediately. It opened at 7.44, up from Tuesday’s 4.63 close. After squirming a bit — I don’t usually consider that early “squirming” to be a real pullback if it’s a matter of pennies — it “popped” a dollar, from 7.21 to 8.25.
In this instance, we decided to short the pop. The large gap, plus a dollar early climb, creates enough profit-taking incentive to give us a predictable pullback. Normally, with a strong stock, we would then look for support back around the open or early low. In this case, however, the pullback broke below 7.21 and continued to lower lows. So we lucked out there with the short.
very news stock is different, but they do follow similar patterns. Knowing those patterns prepares us with an instant game plan when we recognize them occurring. And even when they break from a pattern, we can use those red flags to create new opportunities.
Look for Double Top or double bottom
*A breakdown of either formation is bearish and should be shorted
The bigger the pullback the weaker the trend
Watching the pullbacks-shallow bullish;deep bearish
Watch Open price reactions-open price very important
* Create pivot lines for pre-market low, nearby whole or strike numbers, moving avg, previous day’s intraday high
*Draw trendlines
watch for Flatlining- hold profits longer through cost avg out. Watch for the sharp sell off breaking technicals
Read this before the open
