This setup is starting to be my bread and butter
gapper trade. I look for stocks that gap up and retrace up to 38% of the move from the previous day low to the early morning high. In the case of
RVBD and
TFSM, the early morning high = the
ORH. I then look for a base or reversal to form near the rising 5 period EMA. I prefer if there is sufficient room to move before hitting the
ORH, so that if a failure occurs, I can still generate a profit. Extremely high volume (2-4 times recent range) is essential when stocks gap up more than 5% and both of these stocks met that criteria.
This setup is starting to be my bread and butter gapper trade. I look for stocks that gap up and retrace up to 38% of the move from the previous day low to the early morning high. In the case of RVBD and TFSM, the early morning high = the ORH. I then look for a base or reversal to form near the rising 5 period EMA. I prefer if there is sufficient room to move before hitting the ORH, so that if a failure occurs, I can still generate a profit. Extremely high volume (2-4 times recent range) is essential when stocks gap up more than 5% and both of these stocks met that criteria.
12 comments:
So each morning you scan for stocks gapping up for 5%?
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Jamie,
This looks like a great way to play gaps.
When you say early morning high, do you mean the swing high in the morning, which may or may not correspond to the OR high on a chart with a particular candlestick timeframe? Do you then adjust your timeframe to accommodate the early morning high, or do you stick to the 15 min?
Next, what do you define as the "recent range" for volume? If you use something like a 30-ema of volume on the 15 minute chart, then it's easy to tell if you're over that line by 2-4 times. If it's based on a daily chart, how do you determine if it's on track to be 2-4 times daily volume?
I'm also perplexed on how you choose to enter. When I watch these in real time, I get faked out and end up buying at the wrong time. How do you tell if the base is being broken out to the upside vs just another retest? RVBD's 5th candle represents this well, as it broke the 4th candle's high and then closed back down again.
Yaser,
No, I guess I should clarify. Each morning I scan for stocks > $5 that gapped up. I actually prefer stocks that gap up less than 5% from the previous day close because 5% is huge and maybe that's all they have in them. However, if they gap up more than 5% I will only consider trading them if they have extreme volume relative to their recent average volume.
Thanks for the link.
Prospectus,
Yes, the swing high is a good way to describe it. The recent range of volume is the last 5 days. I'm using a 20 MA overlay. That's the standard with stock charts and I don't know how to change it.
I'm trying not to enter after a red bar or long upper shadow on the 15 minute timeframe. However, once I've picked my spot, I also look at the 5 and 1 minute timeframes to help time my entry and manage the trade.
On RVBD the 5th bar closed red and was still not close enough to the 5 MA. Bar 2 was a near perfect bullish hammer. Bars 3-5 each made consecutive higher lows and as the 6th bar was starting, the 5 MA seemed slightly better positioned. The risk:reward was 1:2 just on a retest of the ORH, so I felt very comfortable going long here.
I like this strategy because there's no rush to jump in early. Letting price retrace, gives the MA time to catch up to price. In the interim, I want to make sure that volume has not dried up completely, but I like it when volume declines during the pullback and picks up again as price moves back up.
Thanks, Jamie. These were great trades! I very much appreciate your blog posts and your willingness to answer endless questions in great detail. :)
Do you actually run a gap scan, or do you just look at your usual suspects list for gaps, or both?
Do you use stock charts Sharp Charts 2.0? If so, then you can turn off the volume overlay and add volume as an indicator, choosing "behind price" like so:
http://stockcharts.com/h-sc/ui?s=RVBD&p=D&yr=0&mn=6&dy=0&id=p49750359110
The number you put in the parameters box is the period for the MA.
Still working the NR7 scan. Did you trade either of the two that moved today? Do you have any more examples of the types of setups you would like it to find?
Thanks Prospectus,
I usually do both, but sometimes I have so many good candidates from the watch list and Briefing.com, that I don't get to the scans.
Thanks for the stockcharts tip. I use the stockcharts realtime extra to scan for gappers. The scrolling feature makes it very easy to look at many charts over a short period of time.
I got a late start this morning so I missed the NR7 move on JASO. The IMAX daily chart was not really to my liking so I passed.
My main concern re: the NR7 scan is to capture stocks like AVCI yesterday and DNDN a few weeks back. They gap on extreme volume levels and after several days carve out NR7. These are usually the best plays. AVCI didn't do anything today, but printed another NR7. Once it breaks $8.11, it will fall to $7.50 on a gap fill. Easy money if we can spot them ahead of time.
Hey guys,
Great conversation here.
Jamie, you said that 5th bar closed red for RVBD, I'm not seeing that in your chart...am I seeing it wrongly?
And how do you ensure that volume has not dried up completely prior to entry?
Thanks,
YR
My mistake YR, I meant the 4th bar printed red. I like to have a green bar as a signal bar for long entries. So I waited until the 5th bar closed green before determining my entry.
I used Michelle B's "lullipop" concept to gauge volume. Here is a quote from one of her posts "The pause in volume is what my trading buddy calls a lullipop, a lull before the breakout, where the equilibrium between buyers and sellers end and the buyers take over."
Basically, she says that near the end of a consolidation, there is a lull in volume just before it pops. If you look at the 5 minute timeframe RVBD, you will see that the lowest volume bar printed just before my entry. There's an element of feel that comes in play as well. My level II starts to pick up speed as volume comes back in. So its relatively easy to time the entry this way.
Jamie,
I'm curious how you would have traded BDSI (if at all)
thanks
Babak,
The sharp pullback off of the morning swing high looks similar to my CDWC trade from Tuesday, however, there is no signal bar on BDSI, so I would have passed.
Jamie, thanks but I'm not sure what you mean by a "signal bar"
Babak,
By signal bar , I meant a bullish candlestick reversal pattern such as a hammer, tweezer bottom, bullish engulfing, etc...
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