Trading Gaps: Following a significant earnings beat with future guidance being raised, MSFT had a huge move higher. It is very important for a stock to hold it’s gap following a large gap up and it is considered very bullish when it does. We initiated this trade (green circle) once we saw MSFT hold it’s earnings gap. We sold 75% of our position when it had a great 3 day move breaching resistance (yellow circle). Since it once again held that significant support around 52.50, we were able to reload our stock, which we expect to make a move through highs sometime the following week.
Now let's take a closer look at the trade.
A number of factors made this trade a great one. The main factor was that it couldn't get back near the low of it’s gap up around $52.25. Which meant there were buyers bidding the stock up.
What we mean by bidding the stock up is that people who wanted the stock would put limit orders in around $52.50 and higher and when the stock would get to that price the buyer’s orders would get filled. When there are enough buyers in the market putting bids in, the sellers will have a hard time pushing the stock lower. As time goes on and the support becomes more obvious, more and more bidders come in and as a result you will see higher lows because the new buyers are willing to pay higher prices. As you can see in this chart every time the stock pulled in, it made a new higher low, a very bullish sign!
Now if we were able to have a bid in at $52.25 (the major support of this trade) and get filled there, it would have more than likely been a bad sign that the stock was going to fill the gap to the downside. Give the ATR (average trading range) of a lower beta stock like MFST (.60 to the market) compared to a name like NFLX . We were not getting into this trade looking for $10+ point move, but a $1-$4 move risking about $.10 to $.15 was more realistic for this trade. We were able to buy 2400 shares at $53, risking around $.10 ($240 risk) and selling into $54 ($1 profit per share) and $54.50 ($1.50 profit per share). When the stock came back in near our price we were able to add back some of the shares we sold, keeping the same stop.
The main takeaways from this trade:
- Buying strength
- Having a proper out- below the low of the gap up
- Selling into strength and prior resistance
- Reloading the sold shares area around the area of the initial purchase
- Being realistic with our targets to take profits
Do you have balls?
Find 3 charts where the stocks recently gapped up after earnings and formulate a game plan for each stock.
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