Dummy Gapper Trade of the Day - McDermott International (Public, NYSE:MDR)

The first two charts are dailies of MDR before and after yesterday's gap open and new all time high. The first thing to notice is that after a big run up leading to the July 6th all time high, MDR had a normal retracement (just less than 38%) of the last leg up, and had carved out two NRBs, the last of which closed on its highs.

Friday's gap up and early break above the ORH put MDR in the sweet spot with potential to take out, or at least test the July 6th high.

The chart above is the 15 minute chart of my entry, exits and trade management. I liked the strong open - WR green bar. The second bar was a consolidation bar which closed at the base. I entered a dummy long as the third bar took out the OR highs. I took a 30% partial at the 50% Fibonacci extension of the previous day low to the ORH. I then monitored the retracement on the lower timeframe below. It was very orderly and did not breach the 38% retracement level. The red line segments on the 15 min. view, mark my stops. I place my stops two ticks below the last WR green bar.

After retracing 38% of the move from the ORL to the first swing high, MDR rallied towards the all time high (thick blue line). On the first test, it easily broke through. The next bar started printing red and I took another 30% partial to lock in more gains. Upon completion, the red bar looks like a hanging man but the lower shadow is less than twice the length of the body, so it doesn't qualify as a true hanging man. That's me talking to myself, trying to convince myself to stay in the trade. I had a good feeling from the run so far that it wasn't over. This time the stock retraced 50% of the last leg up and found support at the morning swing high as depicted by the black arrows on the 5 minute chart below.

MDR slowly moved up towards the previous high and then spiked above it, topping the 100% extension level. It carved out a star with a long upper shadow signaling the end of the move, followed by a bearish doji spinning top. I raised my stop to this level and was taken out on the balance.

The key take-away here is that stocks trading in the sweet spot can keep moving higher. Check the daily timeframe of your gapper stocks to see if you have potential to take it higher and monitor the retracements. Look for topping reversal type candlesticks to indicate when the move is finally over.

BTW, MDR is a watchlist stock. I added it to the list last week along with SGR after Marco-MH497 left a comment on my watchlist post with reference to FWLT. Thanks Marco! Oh, and notice the move on SGR yesterday as well (unfortunately, it moved too quickly out of the gate for me).

This last chart (AMGN) is another gapper trade I took yesterday. I liked the late day strength on Thursday and took this as a momentum continuation play. However, after consolidating a full hour after the OR, it had a nice break and then started to consolidate midway to the 25% extension level. I tightened my stop and booked a small gain. The reasoning here was that AMGN, being a gutter stock was running into too much resistance and would not reach the primary target. IMO, if a stock consolidates for a lengthy period before the break of the ORH, it shouldn't require more than a brief consolidation on the way up to the next extension level. After moving more than 50% of the distance between the ORH and the 25% extension level, it's too late for a retest of the base. A retest should occur immediately following the break. So, when the red bar closed near its low, I made a quick decision to tightened the stop.