Watch for 50/50 Gap Risers
Sometimes when we are tracking a stock to buy, it gaps up before we get a buy signal. This can leave us a bit frustrated. Fortunately, many stocks that gap up do not take off right away. Instead, they pullback to test support, providing us with an opportunity to enter. These stocks often get ignored because traders think they missed the gap play.
The 50/50 Gap Riser is a trade setup that can be approached much like any other 50/50 trade. Tableau Software (DATA) is a good example. The IPO stock gapped up to a new all time high on 5 February, 2014. DATA advanced, reaching a high of over $100 in late February. At this point, investors took profits, and the stock began to fall. Price has now returned to the original gap up price, allowing another opportunity to buy.
In the daily chart above, the gap up led to a rise in price. But notice how price then fell below the 10 SMA, making a fairly orderly decline with the highs hugging the 10 SMA. Price has now reached the 50 EMA which is where the institutions will support a stock they plan to hold.
The key to the 50/50 Gap Riser is that price must hold above, or dip slightly below, the low of the gap up day; price should remain above the 50 EMA. So far, DATA has held above its 50 EMA, and price has closed for the last 6 days in a fairly narrow range.
The next thing is to watch for renewed buying which would demonstrate that the pullback is likely over. For the 50/50 Strategy entry, price must close above the 10 SMA and 50 EMA and RSI 20 must be above the 50 level (it is weak now). High volume is important. A stop loss is generally placed below the 50 EMA (presumed support).
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