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Most mornings we see a couple dozen stocks that are "gapped up", in
other words, they are opening much higher than they closed the day
before. History shows us that in general the gap won't hold and the
stocks will weaken. If they are truly strong though, they will firm
up again and start rising, often around 10 a.m. EST. We call it
the "gap-out" rule.
The idea is that you wait for the morning craziness to pass and if a
stock gets back to its "gap high" of the morning, chances are it will
keep going for a nice gain (it can happen any time of the day
though). By "morning craziness" we mean the flurry of buying and
selling that occurs as the market session begins. The intensity is
determined by the news of the day and the enthusiasm of traders. It
usually subsides around 10 a.m.
Now suppose XYZ opens at $105 after it closed at $100 yesterday.
Chances are that sometime during the morning it will pull back, say
to $103. Well, what we do is take a note of that first gap price
(105). If it manages to tick past 105 (even by an 1/8th) at anytime
of the day, the stock will probably keep going for a while.
Why does it work so well? Because that morning gap price is actually
a very short-term resistance level, and if the stock happens to creep
past that level it is literally breaking out through resistance.
Do yourself a favor for a few days. At the open, take note of the
opening highs of the day in your favorite stocks. After the initial
craziness is over, watch them to see if they are creeping back up to
the initial gap-up price. You will be surprised to watch some move
just above it and often get a quick little "pop" and gain a few fast
points. We use this tactic for both day trading and for entry points
on short-term holds. Give it a try, and you will see its merits.
http://clix.to/wallmann
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