Dangerous Small Gaps

If a stock stages an
expansion breakout
above its 50-day moving average or to a new high,
traders will look for a continuation of this strong movement into the next
trading session. Frequently after a strong wide-range day, the stock makes a big
gap-up open. If this occurs, is will be a great selling opportunity. But what I
want to point out is that a stock tends to run into a trouble if it gaps open
slightly above the previous day’s high or close of the wide-range bar. Let’s see
an example.

Below is a daily chart of Copart Inc (CPRT)
as of the close of June 27. As you can see, the stock made a strong expansion
breakout to a new high on extremely heavy volume. 

The following day on June 28, CPRT
opened 53 cents above the previous day’s close, but below the previous day’s
high. The stock advanced only in the first 10 minutes of trading and quickly
reversed to the downside. The stock could not have any overhead supplies, but
sellers took control of the stock rest of the day.

The reasons for this happening are
anyone’s guess, but it is one more example of the need to be alert and the fact
that there can be a very small difference between a good setup and a bad one.

Have a great weekend,

Eddie