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If there’s one thing that makes for a perfect opportunity for stock traders, it’s earnings season.
When a stock blows away analyst earnings expectations, investors bid the stock higher in the post and pre-market. This causes a stock to gap up and open well above its prior closing price.
Buying gap up stocks can lead to explosive short-term gains (especially in a bull market), but timing is key. It’s crucial to know exactly when and how to buy stocks gapping up from earnings.
The gap trading strategy is widely used among professional traders because it has proven extremely effective. That’s why our swing trade alerts service focuses on a simple gap trading technique to help members profit during earnings season.
Yet, newer traders are often surprised by just how reliable a winning gap trading strategy can be. Despite the huge profits an overnight gap trading strategy can yield, many swing traders often make the costly mistake of avoiding explosive breakaway gap stocks.
Have YOU ever shied away from buying a breakaway gap that went on to be a monstrous winner?
Perhaps YOU wanted to buy a stock gapping up, but were unsure of how to find a proper entry point?
If so, this exclusive gap trading strategy article is just for you.
Let’s take a look at 5 top ways you can buy stocks gapping up from earnings—just in time for the upcoming earnings season.
How do you trade gaps in the market?
If you’re a new trader, it can especially be a little scary to buy a breakaway gap stock that is already showing a massive percentage gain. You may think the price is “too extended” or “overbought.”
However, the 20-year track record of our swing trading service has proven it’s actually a major Buy signal when a stock gaps sharply higher after reporting earnings (or other news).
Some of these gapping stocks are already up 15% to 30% (above the prior day’s close) before we even begin to buy—yet these “gap and go” stocks often become our biggest winners.
5 top ways to buy a Breakaway Gap stock
The Morpheus gap trading strategy focuses on 5 simple entry points for buying breakaway gap stocks.
Below, we use the example of internet stock Snapchat ($SNAP) to show each of the 5 entry techniques.
+28% gap up after earnings
Snapchat ($SNAP) gapped sharply higher after reporting strong earnings, closing +28% higher on 10x average volume—on just the first day post-earnings.
The $SNAP earnings gap up had everything we look for:
- Large percentage gain
- Monster volume
- Breakaway gap to new highs
$SNAP also had both impressive earnings growth and high liquidity:
Gap Trading Strategy: A closer look at each buy entry point
Match each number below with the chart annotations above:
- Above high of the gap up day – Buying on a rally above the high of the gap-up day is a solid entry. This entry technique sometimes requires a wide stop down to the low of the gap up day, but this buy point works especially well when the stock explodes higher right away. This entry worked with $SNAP, but required some patience to hold.
- Pullback to 10-day MA – After a massive earnings gap, the first pullback that touches the 10-day moving average (teal line) can be bought. This is especially true when that touch occurs above the close of the gap up day, typically a strong area of support in a high-quality gap up.
- Breakout above consolidation – The first breakout above the high of a brief consolidation can also be bought. This entry did not lead to an immediate follow-through in price, but definitely could have.
- Pullback to 20-day MA – Similar to Entry #2, the first pullback to the 20-day exponential moving average is in play following a breakaway gap. The 20-day EMA should be above the low of the initial gap up day (as it was in $SNAP).
- Breakout above short-term downtrend line – A gapping stock will often form a short-term downtrend line as it pulls back slightly from its high. It then becomes a valid buy entry when the price rallies above that downtrend line. We purchased $SNAP in the Wagner Daily stock portfolio using this entry method (rally above the downtrend line after a week of tight-ranged trading above the 20-day EMA). We were lucky to enter $SNAP here because the breakout at Entry #3 could have led to an explosive move higher that never looked back.
Snapchat ($SNAP) gains +80% in 3 months (after gap up buy entry point)
The chart below shows the impressive performance of $SNAP after its earnings gap up.
The price of $SNAP rocketed +80% higher after our November 18 buy entry above the downtrend line (#5 method):
For our swing trading time frame, $SNAP could have been easily sold for a 20-30% gain just a few weeks after entry.
Longer-term position traders could have held through the first touch of the 50-day MA (see chart above) to catch a gain of up to +80% before peaking.
Huge post-earnings gains like $SNAP enjoyed are relatively common in a bull market. Our proven gap trading strategy works simply and efficiently.
Profits should be taken quicker in a bearish market, but there are still plenty of profitable breakaway gap opportunities.
Simple tips for a reliable gap trading strategy
Our gap trading strategy rules limit us to only buying stocks that:
- Have strong quarterly earnings or sales growth (+20% or more)
- Are extremely liquid
The gap should also occur while the stock is in a solid base. The price should have at least just broken out from a base one to two weeks prior.
TIP – We are not looking to buy a gap up in the middle of a strong, existing uptrend (take a pass)
Opening price action
If you are able to trade the stock market open, then you can get a relatively low-risk entry by buying a move above the opening 5-minute high on the gap up day.
However, the 5 entry techniques above are designed for part-time swing traders who cannot watch the market all day.
The gap trading strategy is simple, yet can be incredibly effective. This technique is particularly effective when stocks like Snapchat ($SNAP) are rallying steadily after reporting strong earnings growth.
The goal isn’t just to buy when a gap opens. Rather, your goal is to buy the right gap at the right time, then ride the profits until the bullish momentum stalls.
Once you’re able to do this consistently, the stocks you buy using the Morpheus breakaway gap trading strategy will become some of your most profitable swing trades.
Remember to be selective and insist on these three things:
- Strong earnings and/or sales growth
- Heavy volume (at least 3x greater than average)
- Explosive percentage move higher on the gap up day
The key to success is to pick a stock that fits the rules outlined above, then be disciplined to follow your trading plan and properly manage the trade for maximum profits.
If you follow the 5 entry points outlined in this article, you should have a good idea of when and how to buy gapping stocks. If so, you’re already in the best position to profit from a breakaway gap.
It can sometimes be mentally challenging to buy a huge, post-earnings breakaway gap, but staying focused on your personal trading psychology can help.
If you are still not a believer in buying gap up stocks, then start with a small position (ie. 25% of your normal position size) until you gain experience with this powerful swing trade setup.
Finally, note the entry points discussed here are just a guide to our buying gapping stocks—not all gap ups will trade the same way.
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“The Morpheus Team has taught me to not stray away from my discipline. Also, keeping losses small and proper position sizing is key.”
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