Stocks gapping in pre-market offer some of the best opportunities for day trading and swing trading. No matter what type of trader or investor you are, you need to understand stock gaps.

Today we will give you an introduction to stock gaps, and the different ways stocks will behave.

Let’s start by defining what a stock gap is:

What is a Stock Gap?

A stock gap is simply a change in a stock’s price from its prior close. In pre-market and after-hours trading, stocks can rise and fall in price.

Sometimes press releases can cause large gaps in either direction, as a larger number of buyers and sellers enter the market.

It is called a “gap-up” when a stock trades higher than it’s prior closing price. For example, If Amazon $AMZN closes at $3200 and then opens the next day at $3300, that is a gap up.

It is called a “gap-down” when the opposite happens. If $AMZN closes at $3400 and opens at $3100, that is a gap down.

Now let’s get into the different types of patterns you will during a gap up or gap down:

Gap & Go

A gap & go is when a stock gapping up continues the upward momentum when the market opens. You see this kind of momentum when a stock gaps up over nearby by resistance levels, eliminating potential areas of supply to halt the stock’s uptrend. A stock gapping up to all-time highs is often the type of stock that

Gap & Crap

This is when a stock reverses strongly after the market opens after gapping up pre-market. Stock’s that do this will often fill their gap, and test nearby support levels from pre-market, and on the daily chart. A gap-and-crap will often occur when a stock has an especially large gap up, or gaps into resistance levels.

Gap Down Continuation

The opposite of a gap and go. This is where a stock continues its downward momentum from the pre-market. Typically stocks that gap down and continue lower gap below nearby support levels, eliminating potential areas of demand that would bring buyers back into the stock.

Gap Down Reversal

The opposite of a gap and crap. These reversals typically occur when a stock gaps down into areas of support, or it is strong uptrending stock.

Gap and Chop

Choppy stock gaps will typically occur after the merger and buy-out catalysts. We personally don’t recommend trading stocks with these type of catalysts. In general, we prefer to trade stock gaps that have liquid pre-market action, ideally forming a trend we can join at the market open.

Summary

Learn patterns to trade each type of stock gap (besides the chop!). If you want to see how we trade these types of gaps, register for our upcoming free chatroom day and watch veteran day trader Kunal Desai trade live on screen-share!

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The post 6 Types of Stock Gaps: How to Day Trade the Market Open appeared first on Bulls on Wall Street.

One of the most common questions I get from aspiring day traders: How do you know which stocks that gap up will follow through, and which stocks will fade off all day?

We talked earlier this week about stock gaps and how to scan for gappers. Today we will discuss the main technical factors that affect whether a stock follows through on a gap-up or not.

There are 5 main factors that affect whether a gap-up will be sold into or bought up. You will want to have all 5 of these align to have a high probability of getting on the right side of a trend on a gapper:

Nearby Daily Resistance

Stocks that gap-up into resistance will often sell off when the market opens due to nearby supply. Gaps that follow through will typically have no nearby resistance, as they have less of a reason to reverse trend.

Before you buy any stocks gapping up, always check the daily chart to make sure there is no nearby resistance, and there is room to run.  Typically you want to look at about 18 months of price history on a daily chart, and mark out key levels of resistance and support before the market opens.

Basing Period

Stocks get their power from consolidation and bases. The best gap-up plays are usually preceded by a basing period of at least 1-2 weeks. This is a period where a stock trades sideways on low volume in a range. XLNX is a great example of a stock that had a great breakout gap after a long basing period:

You can see how it was trading sideways and consolidating for about a 3 month period. The longer the basing period, the higher the probability of the gap-up following through. The long base in combination with an earnings breakout is one of the most explosive setups.

Catalyst

You should always know why a stock is gapping up or gapping down on a given day. On all the gappers you are looking to trade, you should take the time to look at Yahoo Finance or Finviz to see WHY they are gapping up and down. One of the best catalysts for momentum are quarterly earnings reports. Whatever the catalyst is, be sure to know why the stock is moving. Some catalysts are not conducive for momentum (Buyouts for example).

Daily Chart History

In addition to checking for resistance levels, you want to see the stocks big picture trend and see how a stock has behaved in past scenarios. Stocks that have a history of selling off into gaps will likely do it again. Stocks that have a history of following through on gap-ups will likely do it again. History tends to repeat itself in the stock market.

Also, look at how the stock has behaved in the past with a similar catalyst. For example, if you were looking to play XLNX a few weeks ago, you would go back on its daily and see how it traded after its past earnings reports. You would see that it has had strong days in the past on positive earnings reports, meaning it is likely to do so again.

Pre-Market Trend

A stock’s pre-market trend will be a strong indicator of how the stock will behave once the market opens. Uptrending price action in pre-market will often have strong price action once the market opens. If a stocking gapping up is fading off hard in pre-market, it is likely it will continue to fade off when the market opens.

Don’t fight strong pre-market trends. If there is no obvious pre-market trend, wait to see how the stock behaves when the market opens, and join the trend versus trying to guess which way the stock will go. If you are new to trading gapping stocks, wait for a few candles to form before jumping in. 

The post How to Know if A Stock Gap-Up Will Fade or Explode appeared first on Bulls on Wall Street.

Nearby Daily Resistance

Basing Period

Catalyst

Daily Chart History

Pre-Market Trend

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The post How to Know if A Stock Gap Up Will Fade or Explode appeared first on Bulls on Wall Street.