Here’s how to trade gap openings
Be very cognizant of the
levels stocks open when they gap up or down from the previous close.
A market makers job is to open an up stock where there is supply and open a down
stock where there is demand. These openings are often overdone. Keep a close
watch on these levels as they often provide valuable information.
When there is a significant imbalance of buyers
or sellers the market makers end up taking a substantial position at the opening
against the orders so it’s in their best interest in such circumstances to find
the correct levels to establish positions to start the days trading. After a
significant up opening it’s time for the market makers to start covering their
short positions, and vice versa for their longs on the lower ones. If they
opened the stock at the right level their buying will be profitable and provide
some support for an orderly pullback. It doesn’t always work that way though.
Lately I have been seeing a great deal of stocks gap higher and keep on going.
Here are a few stocks that gapped higher on Thursday.
Regardless of what your position was entering
this action keeping an eye on where
(
JLG |
Quote |
Chart |
News |
PowerRating) opened provided some valuable
information. Below is the 5-minute chart from Thursday morning. It ripped on the
first bar and never traded back to its opening. If you had a short position
coming into action like this you had to at least keep an eye on the high of that
opening bar as a stop. If you were fortunate enough to be long or have gotten
long early on, use the opening as your out.
Take a look at
(
KLIC |
Quote |
Chart |
News |
PowerRating) from Thursday as well.
Similar to JLG, but the 5-minute shows some
differences. This one was opened at a more tradable level as it came off a
little before it was off to the races. Notice what happened on the rally when it
took out the opening price. You had a big up bar which is telling you to cover
if you shorted it against the open or get long.
Here are a few on the downside from Thursday
morning.
You had to get out of
(
TARO |
Quote |
Chart |
News |
PowerRating) when it failed
to hold its opening price at about 10:00. Keeping an eye on the opening level
would have saved you some money on this one as well.
(
CMOS |
Quote |
Chart |
News |
PowerRating) provided a nice trading opportunity
on the long side from the bounce, as long as you trailed a stop to not give back
profits.
The ridiculous can get more ridiculous so keep an
eye on where gapping stocks are opening.
Good luck trading and have a nice weekend.
Ken Levey
Kenneth Levey is head of Trading For Connors
Capital LLC. Mr. Levey has more than 21 years of professional trading experience
having previously been Vice President of Trading and a Market Maker for Spear,
Leeds & Kellogg/ Goldman Sachs in New York. Ken is a 1984 graduate of the University of
Miami where he received his degree in Business Administration majoring in
Finance.