Newbie Trades Analyzed - (NASDAQ: GILD), (NASDAQ: HERO)

A reader asks me to analyse two newbie gap up trades. Here are my thoughts.

GILD gapped up yesterday and had a nice move, closing in the upper half of its range. Today it gapped up again, this time with a wide gap and a strong OR bar, extending yesterdays's move by almost 200%. This was followed by an orderly pullback to the rising 5 period EMA and finally, a three WRB rally which broke through the OR high before reversing. Having described it in this way, I'm sure you've already figured out what went wrong here. GILD was exhausted after this huge, two day move.

If we disregard the fact that GILD was overextended and just look at it as a day one gap up, I've highlighted my preferred strategy in blue on the above chart. For me its more important to enter in very close proximity of the rising 5 period EMA on a low risk, NR, setup and manage the break of the OR high, as need be, when the time comes.

If GILD had consolidated the opening gap through time as opposed to price, your entry would have been perfect. But if a stock gives you a chance to buy it on an orderly pullback, I recommend that you take the opportunity, everything else being equal. Of course, it goes without saying, that I'm not recommending that anyone try to catch a falling knife. Let the stock pullback, define its price support, form a base, and then you can buy a break above the base and the rising 5 period EMA. The other point I'm trying to make here is not to buy after the stock has printed two WRBs. Try to time the entry off of NRBs. There are only a few (avg. 3-4) WRBs in any given move.

HERO was part II of a gap fill play. If you read my chart notes, it will be painfully obvious why this one failed. However, on a regular gap up with no obstacles, you could have expected a 38% extension on this setup. You have a good eye for a base and break entry here, just bad luck on the retracement.