Gaps and traps

walter said...

you know of any way to distinguish between exhaustion gaps vs runway gaps vs normal good strength gaps, etc?

10:40 AM
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Pradeep Bonde said...

I make my leaving trading runaway gap on earnings. One has to look at catalyst plus the magnitude of gap. Gaps of certain magnitude indicate information mismatch. A new set of information was complete surprise and that indicates the move will proceed in that direction. Typically this happens on earnings, new products (in biotechs), regulatory action (on short side), or aberration (say a company has earning growth of 30, 34, 30, 40, 37.....for long and then 5 or -10 or the other way round 5, 7, 6, 8,---and then 100)
So I always investigate 20% plus gaps on both side to see opportunities. You also need to see the volume on such moves. I look at 20% plus 1 million volume.
Exhaustion gaps are easy to find if you know how much % a equity has moved in a year. Plus same thing works on these gaps you see sequence of earning like 80, 100, 120, 130, 120.... and then 140. The stock gaps up like HANS but by that time it was up more than 800% say in a year, so when the grandma in Timbuktu gets excited about it, it is exhaustion gap.



10:57 AM
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Pradeep Bonde said...

The best place to find exhaustion gaps is IBD 100. At some stage they just move ahead of their potential and once the IBD crowd and others get very excited, there are exhaustion gaps or island reversals. IBD 100 is good source of ideas on both long and short side. These gaps also tend to be clustered around earnings.

Now if you are looking for a profitable trading system based on gaps or abnormal % change in price, then the book Swing Trading:Power Strategies to Cut Risk and Boost Profits by Jon D. Markman describes a trading system used by George Fontanills. It is a system based on price and volume gaps.

Now if you know Fontanills, he sells a 3000 dollar option course which basically tells you if you want to master these strategies then you need to buy another $5000 platinum course and so on. So when I read it at first I was very skeptical of it. But I tested it and it has lots of merits.

The system in short:
" Basically it comes down to finding stocks with greatest short term
momentum that will turn in to long term momentum."
The Scans:
1 up or down 30% in a single day on at least 300000 shares traded or
2 up or down 20% in a single day on at least 1 million shares traded or
3 up or down 5$ in a single day on volume of at least one million shares and
4 still trading above $7 and
5 has options
6 has a long term catalyst like earnings or accounting fraud

He buys options on it after few days , typically such stocks after a pause tend to move up or down.

I have tested it and it works, by using options it gives leverage. It gives very few signals daily, but they are very powerful. You can modify it to get better results.