Message #4 From:
Larry Porter Date: April 20, 2008 06:22:08 PM
The "gap out" rule.
If you watch the market day after day one thing becomes very evident. 90 % of the days' action takes place in the first 30 and last 30 minutes of the trading day. Sure, some of that action may last 30, or even 90 minutes into the day, but as a general rule, by 10:15 most of the volatility and wild moves are over. So, keeping track of what happened during those first 30 minutes of trading becomes very important for us.
How many times have you seen a stock "gap" open (which means it opened for trading higher than it closed the previous day) only to see that "gap up" be the actual high point of the day? Quite often we would say. So naturally we don't want to buy the stock at the high of the day, but the question is, "how do we know?"
Well we can't know anything 100% of the time, but what we can do pretty successfully is follow trends. One of the most common "trends" we have focused on for years is the fact that we often see a strong open, followed by selling, followed by another push higher. If you are a serious daytrader, that trend is probably imprinted in your brain! But, what about the person who just wants to make a wise purchase, how does he know when to enter the trade? Great question.
If you look at thousands of intraday charts and compare the time lines, you start to get an interesting pattern. We call it the "gap out" rule. Let's say the XYZ company went out at $60 yesterday. Then this morning the futures are pointing up strongly and XYZ opens at 63, but as is the case, the market pulls back after that initial pop and now XYZ is at 62. The question at this point would be "is it going back up or was 63 the high of the day?" Well here is a very helpful hint. We have found that if a stock gaps, pulls back and then gets back to its gap price, chances are very good the stock will run for more. In fact we have seen chart after chart that shows something extremely interesting and all of you should be aware of it. The second the stock trades at about 1/4 point higher than its initial gap price, it often explodes for a nice pop. Then it pulls back again, but never back to its "gap" price, and will usually pop again.
So in our example we had seen XYZ open at 63, pull back to 62, and then as the market recovered from its pull back, XYZ got back to 63 again. Do we buy it there? NO. But if we see it start to trade at 63 1/4, it's a often a buy signal. Chances are that in a very short period of time, XYZ could put on another dollar or so.
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