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Gapper
- Examples
This stock showed up on my Gapper Scan
when it was trading at 23.00. It was trading higher than
the opening price of 22.63. When I use the Gapper Scan,
I take a close look at the stock and its normal trading
pattern. Bollinger Bands are a very useful tool to see
any deviation from the normal price action. What I liked
about this stock was the fact that the bands were close
together. The stock has been trading in a channel
between 18 and 26 for the last five weeks. If the stock
was to breakout of the channel, it could very easily
trade above the Upper Bollinger Band. Let’s see what
happened next.
The stock breaks out through the Upper
Bollinger Band and the channel on high volume. It closes
at 26.94. The strong volume and the fact that the stock
was just at the bottom of its trading channel two days
ago give us a strong clue to future price movement. Please
note, this stock showed up on the Usual Suspects, Power
Trader, and Gapper scans on the day of its breakout.
Over the next two days, this stock
trades up to 35.13. It is up 52% since it came up on my
Gapper Scan. This is where you have to control GREED.
The stock has made a big move in a short period of time.
It would be wise to take profits. As you can see in the
chart, the wise traders cashed in their profits, and the
stock sold off. It closed at 29.50. This case study also
shows the three-day methodology. The lucky
ones found the stock on the first day of
its move. The smart ones entered the stock
on the second day of its move. The bag-holders
bought the stock at 32-35 on the third day
of the move and are now looking to break even, because
the stock closed at 29.50.
This stock showed up on my Gapper Scan
when it was trading at 13.50. It was trading higher than
the opening price of 13.00. What I liked about this
stock was the fact that the low price the stock traded
at last week was the 26-month low. The stock has been
trading down for a while. The up day prior to the gap
open was on high relative volume. Volume increased today
as the stock moved towards resistance at 14.50 (the
Upper Bollinger Band), and 14.75 (the previous high). My
only concern was the tremendous overhead supply at the
higher price levels. Consequently, I knew that the
volume would have to remain strong in order to have a
strong sustainable rally. Let’s see what happened
next.
Point A shows the day the stock showed up
on my Gapper Scan. The bottom horizontal line shows the
gap-opening price, which I like to use as a stop loss
level. The stock took out the resistance level out on the
next trading day and consolidated for two days (Point B).
Then, the stock gapped up again on strong earnings report
(Point C), and traded above the Upper Bollinger Band for
three days. The top horizontal line shows the gap-opening
price, which we use as a trailing stop for this trade, or
an initial stop loss if you entered the trade at Point C.
The stock then traded above its 20-day MA but lower than
the Upper Bollinger Band for the next three weeks. The
20-day MA caught up to the stock at Point D, and the stock
traded back up to the Upper Bollinger band at 35-37. This
would have been a good place to exit the trade.
To summarize this case study, I found this
stock at 13.50 by using the Gapper Scan. The stock went up
to 37 (186%) over the following six weeks. The stock
actually gapped-open twice and neither gap-opening prices
were taken out. The pullback down to the 20-day MA was on
low relative volume, and the bounce off the 20-day MA was
on high relative volume. On the last day, the stock traded
the highest volume over the last two days and closed below
the opening price. This was a great signal to get out of
the trade.
This stock showed up on my Gapper Scan
when it was trading at 46.75. It was trading higher than
the opening price of 46.22. What I did not liked about
the stock was the fact that the Bollinger Bands were
extremely expanded. I did like the high volume and
breakout though. However, I knew I could not expect the
stock to go vertical without some consolidation.
The stock did move higher, but the low
the stock made the day after the gap-open was taken out
on the following trading day. This would have made
staying in the trade extremely difficult. The following
day the stock gaped up and sold off. The next two days,
the stock made lower highs and lower lows. It would have
been a violation of money management rules to stay in
this trade. However, position traders, who would have
used the gap-opening price as a stop loss level, may
have stayed in the trade while most of us wouldn’t.
The enjoyed the same fortune of good
news and gapped up again. The stock traded up over
resistance. Although it showed up on my Gapper Scan
again, I did not trade it. The reason I did not trade it
was that I had an opinion rather than watching the tape
and the chart.
Indeed, the stock traded straight up on
high volume like a moon rocket. The shorts were getting
killed on this stock. The low float, large relative
short interest, and positive news were the major
contributing factors for the sharp upswing in
price.
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