On December 12, 2014, Adobe Systems (ADBE) gapped up on earnings to $74.17. The stock closed the prior day at $69.74. Now, the novice trader might think that the stock was moving up too much and therefore he or she should short it, while the experienced trader would want to look long for a bigger move. This is where experience pays off.
Questions To Ask
The first question I ask myself in reviewing premarket gaps is, “Why is it gapping?” Once I have identified that it is gapping because of solid earnings and good guidance, I move forward to the next question – “Where is the stock gapping from?”
This question refers to how it was trading for the last few weeks. Was it in an uptrend or was it pulling back? ADBE had pulled back to $70.00 after tapping into the overhead supply zone at $74.00. I would then ask, “Where is it gapping to? Is the stock gapping up into a supply zone?”
For example, ADBE gapped up over a prior supply zone at $74.00 and two daily pivots so it is important to ask, “Does ADBE have room to move higher without any price resistance to the left?”
ADBE gapped up to all-time highs, so it had zero price resistance to the left and had free room to roam higher. See the chart below to review the questions in line with the gap review.
Questions To Ask About Gaps
- Why is the stock gapping?
- Where is the stock gapping from on the chart?
- Where is the stock gapping to on the chart?
- Does the stock have room to move into the direction of the gap higher?
For more on learning how to trade gaps, click here.
