Dummy Trade of the Day - Verigy Ltd. (Public, NASDAQ:VRGY)

VRGY gapped up on strong volume. Initially it retraced below the daily pivot high, but quickly recaptured and closed above it. The second bar was gravestone doji type bar which did not inspire confidence. As the chart developed, I decided to use the 30 minute ORH as my base because it was a lot cleaner and made the chart easier to read. By mid to late morning, the stock had worked off the initial negativity and began to consolidate in a NR on declining volume. As price and the rising 5 period EMA collided, VRGY carved out a NR7 bar, following which price expanded and my buy stop order was hit.

The reason I decided to stick with VRGY despite the gravestone doji, was that there was no resistance. Once the ORH was taken out, price ascended into virgin, blue sky territory.

My Dummy Trading Rules for Base Breakout Gappers:

1. Very high relative volume;
2. Maximum Fibonacci retracement of ORH to previous day low = 38%;
3. Minimum risk:reward ratio for target 38% Fibonacci extension = 1:3;
4. Proximity between price and 5 period ema at base breakout point;
5. Length of consolidation vs. size of gap, ie. the wider the gap, the longer the relative consolidation period;
6. Volume contraction prior to breakout.