You can see in June ADXN gapped down from roughly $3.50 to around $2. That leaves a gap on the chart. Now, normally a big gap down is bad news … Especially for traders who buy and hold...
But for day traders, gaps can create opportunities.
After a stock gaps down, if it consolidates and grinds back up to the gap level, it can often mean the gap will fill. Meaning the stock will climb to the lows set before the gap.
And when a stock has news, that's added fuel that can help it break out of consolidation and fill the gap.
So why is a gap fill a strategy some traders use?
Think about this…
What's the bagholders dream?
To get back to breakeven. So the holders from above the gap won't sell in the gap. They want to break even.
And the people who bought below the gap won't sell, because they're all green.
So a gap fill chart is similar to a stock breaking out to new highs…
There's no resistance overhead in the gap.
And like a lot of trading patterns, they become self-fulfilling prophecies because traders believe in them.
But nothing in trading is guaranteed…
And the gap won't necessarily fill in one day — as ADXN showed us yesterday. So keep your expectations in check.
If you like this strategy and are looking for another potential gap-fill play, look at my Amazon.com, Inc. (NASDAQ: AMZN) trade idea from the weekly watchlist. I think if it breaks $125, it could close the gap to $135 and potentially go even higher.
For higher-priced stocks like AMZN, remember the 'rule of 10.'
Have a great day growing your accounts everyone. I'll see you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
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