Tackle Today: Gaps and the 5-minute Rule
February 28, 2023
Patience pays when playing the gap
Traders,
Price gaps are an all-too-common occurrence, especially when the market is in a downtrend. They occur when there’s an imbalance between supply and demand at the open. If demand exceeds supply, then prices jump higher to find equilibrium. The opposite happens when supply exceeds demand.
You can see one of two price responses to an up gap. Let’s call them “gap ‘n’ go” and “gap ‘n’ crap.”
If you can’t tell from the names, the gap ‘n’ go occurs when prices open higher and keep climbing. The gap ‘n’ crap happens when prices open higher and immediately go down, usually filling the gap.
Getting caught buying at the open can be very frustrating if prices immediately sink back down. To minimize the possibility, consider letting the market open and trade for five minutes (maybe even 10 or 15), then mark the high of that period. If the stock can break above the 5-minute high, then it’s at least some indication that prices are continuing in the direction of the gap versus reversing.
You’d be surprised how often that little technique will save you money.
Gino’s Gems
Chart of the Day: Lattice Semiconductor (LSCC)
LSCC was on our bull watchlist. On Monday, it gapped up, potentially triggering buyers. Then it dropped like a rock. You wouldn’t have gotten in if you waited for 5 minutes and used the high of that bar as your new trigger.
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