|The basic action in the setup is a move higher over several days with the last day an open candlestick. This means that the open is lower than the close and the stock was trading strong on the day. You want to see the close in the upper half of the day’s range and the closer to the high of the day the better. The key being you want to see strength on the after after several days of strength.The next criteria is an extreme gap down the next morning. This gap must open under the lows of the open candlestick. This includes under any lower tails or shadows the open candlestick bar might have. Take a look first at IMAGE A. This is an example of CMTN. What you will notice is a large run up with the top candlestick a 20/20 or marubozu candlestick bar. The body is open/white and the close is near the high of the day. Next, on the 18th, you will see an extreme gap down. Typically what you are going to notice is that on that first day following the gap a selloff hits right away. Often the majority of the day’s range following the gap is in the morning. This brings to the entry: a short right away at the open.
This strategy works best in Nasdaq stocks. In the NYSE I would prefer to see the 5 minute low broken. It is very rare to find a good setup in the NYSE… When it occurs you need to make surethat it closed very close to the highs the day before to reduce risk. The stop for this (everyone take a deep breath) is above the high of the open candlestick. A break in that is the only way to say it failed. Now, don’t panic though…. I rarely use that… What I often do is instead use a designated point stop… like a 2% move against me moved to above the 30 minute high as soon as that is put in. You could also wait for the 5 minute low to be broken and place a stop above the day’s high. If you look at these intraday though, you will notice that often they drop quickly after the open… This is not a gapper play you can wait for the 30 minute low to be put in on or you miss a great deal of the move on the first day. Now, it is one you can trade on a number of time frames though. Say you had used above the open bar as a stop, then you could look to simply hold for up to a few weeks using a trailing stop above the day’s high after about 4 days. Or, you could trade in intraday using the stop above the 5 min high and entry under the 5 min low as mentioned a minute ago. The thing with this setup though, is that it tends to mark the beginning of a fairly decent downward move in the stock.
News often tips off the gap leading to the selloff. Take a look at the example of LU everyone probably remembers… IMAGE B. This was a bit different in that it had pulled back a little from the highs with the open bar an inside range bar but is was still just after a decent upward move. Since I don’t look at this setup in the NYSE due to the nature of how the specialist works, I did not think much of it at the time, but it still worked. Often times this setup can be used for some longer term position trading if you do that. As you can see, all of these examples are still moving lower. SYMC is one that setup today but I did not catch in time.
The hard thing about this is scanning for it. I use a scan Nasdaq dumpers/point/percent losers but do not always get to them right away so it is often a matter of luck. The room managed to catch RNWK (IMAGE C) just over a week ago but unfortunately the move the next day shook out those swinging it… just in time to continue lower This is often why it is best to position trade with wider stops, esp trailing stops. RT3 has a feature to scan for such dumpers It is under Favorites Then Market Minder Open minders 1 and 2 One is the TAL Chain Listing which gives the scans and the other is the minder to drag the scans to.
The following are several more examples of this setup: