Frequently Asked Questions
Q: How do you determine if a stock gapping up is buyable? If it is buyable, how do you time your entry? Do you enter on the open or wait for it to trade for a while? after the 1st 1/2 hour? later in the day? I am sure there are no hard and fast rules that govern when to buy gap ups, but I would love to pick your brain on a generalized topic such as this.
A: A stock gapping up is buyable if it is showing top quality fundamentals (excellent earnings, sales, return on equity, pretax margins, industry group, institutional support, etc) as well as top quality technicals (the price/volume action leading up to the gap up day should be constructive).
As for how you time your entry, you hit on a key point- there are indeed no hard and fast rules that govern when to buy gap ups. You have to consider:
=the behavior of the general market prior to and on the gap up day
=the behavior of the stock prior to and on the gap up day
=the overall fundamental and technical strength of the stock
=the gap up volume after the stock opens for trade- how much volume is coming into the stock during the first 5 min, 15 min, 30 min, etc
=you may just decide to buy the stock at the open, which is ok as long as you realize that the stock could fall during the trading day beyond your maximum risk levels and force you out of the position
=you may decide to wait until later in the day to see how well the gap up holds even if it means you might have to pay a bit more.
Further discussion is shown in our presentation handout here: http://media.virtueofselfishinvesting.com/download/Traders-Expo-Las-Vegas-Intensive-Workshop-November-2011-Buyable-GapUps.pdf