gap-reversal
Overnight gap in the direction of the trend, reversing and filling the gap
What defines it
Big overnight gap when it's been trending in the same direction. Spotting this easily setup derives from the breakout watchlist, since you are already watching the biggest movers. It either gaps up too much after a strong uptrend, or it starts to reverse, changing the trend to the downside and having a big gap.
What makes it work
You have to think about how meaningful the gap is, based on the market cap and volume, a 10% gap on a 100B stock is very different from the same gap on a 50M cap stock. If the gap is into a support level, it is more likely to bounce. Also after the open, if it keeps going in the direction of the gap too fast, it is likely to capitulate and reverse. I personally like it better going long, but it works in both directions.
Examples
all 9 →Massive 9% gap, even considering its current volatility. Strong sector. It just had good uptrend earnings. But it's been down for the last 5 days leading up to this day, which makes it an even better opportunity. Premarket goes down right before the open while SPY goes up. It capitulates at the open, and I get in as it starts to bounce, with a stop around the low of day. Get out fully or sell half as it fills the gap. Even before that can be acceptable, as it has already bounced a bunch, and exit the rest after momentum ends.
Strong sector for tech services. Rumors of a declined acquisition bid made it gap down. Earnings are steady and good. For a market cap this big, a 12.5% opening gap is too big. The premarket gap got as low as 18%! I waited for the price to play out and got in after it broke a 3-bar consolidation to keep going up. A gap this big usually stalls the price, so I got out as soon as that push lost momentum.
Strong sector with good steady earnings previous night. It opened with a 6.6% gap, but the premarket low got as low as 9%!, definitely an outlier move. I wasn't sure what the plan was to trade it, but it capitulated all the way down to the -9% again, and I used that level plus the low of a similar gap a couple of days before as a stop level. As it pushed too much in a similar fashion it capitulated, same shape of the other gap that I used as support, and fearing the same behavior I sold half, and trailed the other half as it lost momentum.
Every characteristic points it should go up. It had steady good earnings the previous day. A 14.1% gap on such a big company is pretty big. It is on an uptrend on the daily chart. Tech services ir currently a strong sector. It starts to dip a bit on the open, you can enter as it bounces back up, breaking out of the pre market resistance and following the premarket uptrend. Selling half as it fills the gap and the rest when it does a bigger pullback to protect profits.
They are on a downtrend and previous gaps didn't bounce. Gapped because they got hacked Health tech is one of the strongest sectors right now. Long term support zone, starting to go up longer term. SPY is neutral, so nothing bad. Consolidating with decent volume on premarket. Huge 6.3% gap on pre market. The entry, as it breaks the pre market consolidation, I like the exit as it fully fills the gap within the first 2 bars, and if you want to get greedy, can set a tight stop and get stopped out almost immediately.
Massive 17.4% gap on good steady earnings! Into a support zone, with a huge market cap. Cherry on top, it keeps going down until it's down 21% within the first 3 minutes of market open. Got in as it starts to bounce, risking low of day, sold 1/3 as it was reaching the opening price. Sold the rest when I saw a bigger consolidation, the range of the bar was already pretty big so didn't want to get greedy and give back profits.