When You Miss An Intermediate-Term Opportunity Due To A Gap, Try This
The market managed to avoid selling off sharply today.
That’s about all. This week should be interesting with the
election coming up soon and the end of the month on Friday. Short-term, I still
don’t see any significant advantage to either the long or short side. On
Wednesday I will provide my complete month-end market breakdown.
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When stocks gap up past
intermediate-term traders buy points, they normally consider three options. (1)
Buy the stock because the gap is a sign of strength. (2)Pass on the stock
because the large gap means the nearest support is far away and the trade risk
is too high. (3) Wait for a pullback and look to enter on a resumption of the
trend. Any of these are reasonable, but there is a fourth option.
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Traders can look to
shorter-term charts for entry points. If the gap up is for real and the stock is
going to follow-through with continued strength, this could be a way to enter
the stock after the gap up with relatively tight stop levels. Let’s look at a
chart of Google
(
GOOG |
Quote |
Chart |
News |
PowerRating) as an example.
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GOOG gapped up about 20 points
on Friday after they reported terrific earnings. Over the last two days it has
continued to run. If traders wanted to try and profit from this action, one way
to do it would be to trade the intraday chart just like it was an
intermediate-term chart.
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What we see above are two Cup &
Handle breakouts on the 5-minute chart. The first happened around 11:15 on
Friday. After a decent run-up GOOG formed a base-on-base cup & handle that broke
out around 11:30 today. Either one of these breakouts were buyable and your stop
could have been placed below the low on the handle. This would mean 2-3 points
of risk, rather than 20 or more.
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When you happen to miss an
intermediate-term opportunity due to a gap, looking to trade the stock using
shorter-term charts can be a worthwhile alternative.
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Best of luck with your trading,
Rob