Gappers

Explanation: 
An after market catalyst (such as earnings) causes a stock to open the next trading day significantly higher (gap up) or lower (gap down) than the previous day's closing price. "Gaps" are a common scanner and/or screener setting used by a high volume of traders. As a result, the stock gets a lot of attention at the opening bell. These stocks are highly volatile as there is a strong battle between buyers and sellers.  
 

Gap up:

Sellers are represented by 3 groups:

  • Traders and investors that were already holding long positions before the move up and are now taking profit.

  • Short entries by traders thinking that the stock moved too much, is now overvalued and should sell off.

  • Traders that took positions premarket and are looking for a momentum pop to the upside before dumping their positions.

Buyers are represented by 2 groups:

  • Momentum traders believing the stock will breakout out of the open due to the news and the high volume of observers.

  • Traders and investors that were already holding positions before the move up and are now being squeezed out.

Gap down:

Buyers are represented by 3 groups:

  • Traders and investors that were already holding long positions before the move down and are panicking to sell to prevent a bigger loss.

  • Long entries by traders thinking that the stock moved too much, is now undervalued and should regain ground.

  • Traders that took positions premarket and are looking for a momentum pop to the downside before dumping their positions.

Sellers are represented by 2 groups:

  • Momentum traders believing the stock will breakdown out of the open due to the news and the high volume of observers.

  • Traders and investors that were already holding short positions before the move down and are now taking profits. 

What to look for:  

  • The gapping move should be at least 3% (e.g. a $100 stock should be gapping up to $103 or down to $97). 

  • High premarket volume (at least 50k). 

  • Low float: <50mm for small cap and <500mm for large cap.

  • The pattern should show continued strength in premarket and should not have retraced at least 50% of the gapping move.

    • Example on a gap up: If the stock closed the previous day at $100 and gapped up after hours to $120, you wouldn't want to see a 50% retracement of the move below $110.​

    • Stocks that show a decent retracement of the gap up/down in premarket have opportunities for the gap reversal strategy.

Timeframe(s): Sub 1-minute, 1-minute

When to enter:

Wait for a lower risk entry, gappers can be incredibly volatile and quickly swing the other direction without warning.

Gap up:

  • A break of the premarket high

  • A break of an established premarket pivot

  • A break of a historic resistance level or moving average

  • A pullback on lower volume followed by increased volume on a green candle that breaks the high of the previous candle.

 

Gap down:

  • A break of the premarket low

  • A break of an established premarket pivot

  • A break of a historic support level or moving average

  • A pullback on lower volume followed by increased volume on a red candle that breaks the low of the previous candle.

Profit Target: 
Initial profit targets of 2% and 5% with a runner to the next level of resistance (adjusting your stop along the way).

Stop Loss: 

  • Just below (gap up) or above (gap down) the key level that is being breached -or-

  • Just below (gap up) or above (gap down) a previously formed pivot -or-

  • A predefined max loss amount based on your share size and risk tolerance.

Examples:

DIS - Gap Up
DIS - Gap Up

PM high entry

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OSTK - Gap Up
OSTK - Gap Up

PM high entry

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KSS - Gap Down
KSS - Gap Down

Pullback entry

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INO - Gap Down
INO - Gap Down

Descending trendline entry

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