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Registered User
Joined: 3/15/2008
Posts: 45
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DavidJohn,
Take a look at HUN. Things are settling into a tight range after 5 days. I want to wait a few more bars, but I'm thinking this could be a good candidate for a reversal.
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Registered User
Joined: 6/6/2005
Posts: 1,157
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y endsley,
There are a few stocks that gapped 5 days ago on the Russell, and I tend to be semi-cautious when this many stocks gap together. It could represent a group climax and could represent a continuation. At times like this I like to look at valuations and see how we're looking fundamentaly. Because if the funds are value shopping they want value. I do this easily by visiting "valuepro dot net". Don't know if you've ever been there, but i can type in the ticker and quickly get a valuation.
Of the 9 stocks that gapped more than 5% 5 days ago , 7 were in my price criteria range of above 10 and below 40. On the left are their prices and the on the right their valuations:
CSE 11.18 $0
CVH 31.02 $157.42
HNT 25.90 $125.10
HUN 12.63 $0
SMG 19.78 $63.52
UNH 29.79 $172.76
WCG 37.30 Innacurate information
Taking this as my guide and comparing the valuations to the price moment this far after the gap i would have to say that I like CVH 1st and UNH next. it appears that the health care sector as a group is selling off and placed them far below their valuations.
I do also like HUN and would consider it a buy above $13.18 (the high of the gap bar) with a stop at 12.11 (the low of the gap bar.
CVH I will be buying tomorrow. Actually, i just noticed it's trading up over 3% afterhours. If it gaps too high at the open I may have to let it go. Normally, I only like to discuss theory on the message Board and not the stocks I'm trading because it places unnecessary performance anxiety ontop of an already volatile situation. (for me). But I think it would make for a good discussion of gaps and gap trade management whether the trades work or not.
Here are the charts:
David John Hall
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Registered User
Joined: 5/12/2008
Posts: 102
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QUOTEBut I think it would make for a good discussion of gaps and gap trade management whether the trades work or not.
Hi David
I'm happy to get your discussion underway.
As stocks fill around 80% of gaps at some point, do you look for gaps down that then fill upwards rather than a gap up that has greater probability of filling the gap downwards at some point after the gap was made?
Also does your backtesting show higher probabilities of the stock moving upwards to fill the gap after a 5 day period?
Thanks
Chris
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Registered User
Joined: 6/6/2005
Posts: 1,157
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Hi Chris, thanks for joining the discussion. I have been backtesting gaps extensively for about 2 years now. I won't say it's the only thing I've focused on because I also like to find very strong momentum stocks.
My testing and trading has lead me to three conclusions:
1. Downside gaps have an excellent success rate, not necessarily to fill completely, but to provide a profitable trade over the next month of trading.
2. That a settling period of 5 days provides an excellent "low" risk entry. I put low in quotes because, seriously, look at the charts, there's really nothing that looks low risk about them. I discovered this by entering and losing enough on the day after the gap and watching what happened in the days that followed.
3. Gaps that occur below the 50% replacement have a higher chance of being climactic reversal gaps. I don't trade any gaps above this line.
Now, you say that the gap up has a greater probability of closing compared to the gap down -- I cannot agree or disagree because I haver seen a study comparing the two. If you have one, I'd love to take a look.
Here's a chart of the finished product. We have a gap on large volume, a 5 day settling period, and then buying interest, It can produce some great gains, some mediocre gains and some losses. But the net result is profil. Like any other psystem, this one experiences drawdowns and 2007 was one of those periods. I am happy to report, however, that things are looking up again.
With a trade like this, once I have a 10% gain I watch price activity very closely and use a tight stop. This is because 10% seems to be the bounce reversal level. If it's just a bounce and not a reversal, I'll be happy to take my 10% and move on.
Thanks for opening up the discussion, Chris. Any and all thoughts are welcome.
David John Hall
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Registered User
Joined: 6/6/2005
Posts: 1,157
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Looking at the WCG chart has given me several more thoughts on the topic that I will be testng...
1. Does the range of the gap bar provide ant clues.
2. If price trades below the low of the gao bar will that create a btter trade.
3. How does the slope or trend prior to the gap factpr into post gap activity.
David John Hall
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Registered User
Joined: 5/12/2008
Posts: 102
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Hi David
Thanks for this excellent information.
I have recently been day trading gaps up, with some success as long as I used a scalping approach to catch the momentum early in the day, however, as we all experience, there have been several notable (and painful) failures as the momentum rapidly dwindled.
There seems to be a risk of trading a gap up that you enter at the high for the day and then hit the retracement. This is why your thoughts about gaps down are of interest, although plainly not for a day trading strategy, unless for shorting!
The recent SQNM chart almost supports your five day theory with huge profit potential:
As an aside - scanning and detecting inverted hammers can prove very successful as the SQNM chart shows.
Presumably your rule of prices below the 50% retracement is as per your thoughts that institutions invest more heavily below the 50% retracement. So you are looking for candidates that are tempting to the institutions.
Thanks for pointing out ValuePro. I'm going to add that information into my stock pick criteria.
Chris
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Registered User
Joined: 6/6/2005
Posts: 1,157
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Hi Chris,
I started out trading intraday gap downs and quickly learned that was a tough game to learn and requires nerves outside my grasp. I am looking for institutional support and value traders coming in. It is of course, impossible to know if that is happening for a fact, but the trade does work best on bigger cap stocks and I believe it's for that reason. If a stock with a good valuation falls prey to an irrational market panic, prefabricated or genuine, and the divergence between fundamentals and technicals is there for everyone to see then, it's my belief that the institutions will take note. Now, if the news on that stock is XYZ, Inc stock plummets after court rules that new drug causes humans to grow flippers, then obviously it's a no-go. But if a certain sector has just fallen out of favor or the sell off is due to rumor or maybe positive earnings that wern't positive enough...then I will look into it.
David John Hall
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Registered User
Joined: 3/15/2008
Posts: 45
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Good call DavidJohn on CVH if you went long yesterday. I'm still waiting for HUN to settle. For that matter, waiting for the entire market to settle.
I do like to collect option premium every month, so I sold the 40 July calls on WCG with a buy stop at 39.
If it reverses, great, I collect premium and the gain from 39 to 40 if the stock stays above 40 at expiration.
If it keeps going down, great, I collect premium and that's that.
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