Each morning I build a watch list of stocks that are either gapping up or gapping down before the market opens.
For example, Monday KO (Coca-Cola Co.) was gapping down on earnings and had good volume with over a million shares traded in the premarket.
BIG VOLUME IS A CLUE
Seeing the big volume on KO in the premarket was a clue that I wanted to focus on KO at the open. Knowing the areas of support and resistance is your first clue to giving you the guidelines to be either short or long. Here is how the play unfolded to us in the Gap Trading Room.
I first called a short after the open but it never triggered to hit our entry. So I waited patiently knowing that there was a good area of support and demand that could be played off the long side if KO sold off. I waited and KO sold off.
NAILING THE ENTRY
I found an entry long that I posted to the trading room. We entered at 39.60 long with our stop just under the LOD looking for price targets up into 39.90 and HOD. We nailed the entry on KO. It was off to the races and we hit our first price target area and unloaded half of our position and started to trail out the back half. As KO pushed into HOD, our final target, we unloaded the back half for a very nice trade.
THE TAKEAWAY
Trading gaps can provide you with very nice risk parameters that can equal some very nice gains and can be played both long and short.
