Gap Up Trade Ideas

Today was one of those days..

We were all excited about the gap up, just to watch the market fade, then chop, then move again, etc.  It’s very hard to understand when and where to make a trade… do I chase the open gap up?  Do I wait?  Damn, my swing buy orders triggered, but they are down at the close. Now I’m holding a stock that’s in the red on an auto-buy scenario.

Today was hard.

Don’t just look at the final numbers with Dow up almost 100 points and say to yourself,  “why didn’t I make money today?”  Let’s look at some strategies to consider when trading gap up days. In my opinion, I consider gap ups (whether market or individual stocks) one of th hardest to profit from.  However, there are some good strategies.. the key is finding one that works best for you.

This information was gathered from stockcharts.com, experience, other blogs, books, etc. and is a quick overview.. study more on your own. We’ll have lots of gap up days down the road.

For day traders:

So, you woke up this morning and some of your favorite stocks are gapping up in pre-market.  Not only that, the futures are pointing to a higher open thanks to news, or some event in other markets. What do you do?  The price is already above my target entry… am I chasing if I buy at the open.

This is a common scenario and exactly what we saw today.  However, there are a few techniques that might just save your ass worth considering.  (all based on 3 to 5 minute charts)

1. What did the pre-market volume for the stock you’re watching look like? If the pre-market volume was weak, but the stock gapped up at the open anyway, I would consider this a risky buy.  What you’re likely buying is a market gap up in an individual stock that rode the morning wave.  However, this wave, more often times than not,  will recede for this individual stock.   Simple rule number 1 – if a stock gaps up above the previous day’s highs on little to no pre-market volume, I avoid the open chase.  Move to step 2.
2. Did your stock open as a full gap or partial gap? Full gap means above yesterday’s high and partial means above close, but not above yesterday’s high.  Obviously, a full gap has a better chance of going higher than partial. The partial still has yesterday’s high acting as resistance. I tread both the same, but your odds of stronger swing returns are better with volume supported full gaps.
   1. Playing the full gap – WAIT! Sit on your hands and watch the move for the first hour, or so.  If the price is below the high made during the first hour, consider a limit buy just above the first hour’s high.  Watch your volume – relative volume needs to be above yesterday’s in order for the odds to be in your favor of a continuation move up on any pullback during the first hour.  If volume is weak during that hour, you could even consider a short with a short cover just above the high of the morning.
   2. Playing the partial gap – Only one main difference.  Did the first hour’s high beat out the high from yesterday?  If not, you might consider a smaller long position than you would in a full gap. you can always add to the position if it gets above yesterday’s high WITH volume.  Again, if you have multiple watch lists, the full gaps are the better choices, but never take your eye off volume.
3. Entries on pullbacks. Let’s say, after the first hour, you watch the stock hoping it gets back above the morning high so you can jump in, but in never gets there.  Is it still in play?  Maybe.  First hard rule I stick by – I will not buy on the pullback if it is below yesterday’s close.  However, if the pullback stayed above the close, then I look for pivots (intraday indicator (pivot points)).  If the price pulls back to one of the pivots (pivot, R1, R2, R3), then I would consider a long buy (partial position) if it bounces from there with volume.  This is not as reliable as buying on breakout above morning highs, but it’s worth considering if volume is generally strong and the stock is in a strong sector on a market up day.

My simple rule is to never buy a gap up at open unless it has MASSIVE volume.  Let’s wait on it for an hour, look for volume, and enter only if it gets back above the first hour’s high.  If not, consider for short or look for pivots.

Today, I think too many of us went gap up chasing instead of waiting for the trade to come to us.  Missing a big spike doesn’t mean you made a bad trade.  There are others and often times that big spike stock will come back for you.

For swing traders who must place conditional orders the night before:

This is a tougher position to be in, emotionally.  The fear, of course, is that you’ll set a limit order and it will get completely jumped at the open and never get filled.  I say, so what. So we missed a boomer.  It’s better than setting a market order just to get filled at the open at the high for that stock just to have it fade all day while you’re away and unable to do anything about it.  If your order didn’t get filled, visit it that night and see how it behaved during the day.. did it hold support? Did volume maintain throughout the day?  Lots of sellers at the close?  Maybe you don’t want that stock and happy as hell you didn’t get it.  Maybe there is a new entry.

I hope this helps.  Please let me know if you have any question or anything to add.  It’s frustrating to not make a lot of money on strong overall market days, but it’s even worse taking a loss.

Today was one of those days.