Here’s how you take profits on a gapper. Check out Baozun (BZUN) (March 06, 2019)
BZUN
I want to look at the methodology for selling Baozun ( NASDAQ: BZUN ) here at the open because that was really what the right thing to do was. You look at this stock and you realize that in January, between the beginning of the year and the pre-earnings setup, the stock had run up over 40 percent; that’s a pretty good deal. It had broken out above the 50 and the stock was up about 20 percent. So this is a stock that is really ripe for profit taking. If you had just drawn the lines here, down there, down there; look how far the stock had gone. The stock is up quite a bit and so to be expecting it to just continue to move higher for any appreciable period of time is really kind of asking for the unexpected.
The company reports earnings and then this is what happens; you look at it and say, “Oh, it’s only down 55 cents, 1.4 percent.” No, this is a reversal, at least the way I see it, I could be wrong. This was a massive high volume move on earnings. And while the stock only closed down a little bit, which, by the way, if you just look at it on a line chart it looks like everything is fine but then when you look at it on a candlestick you can see it is a totally different thing. This is a stock that had deep, deep selling pressure right at the open.
This was where the stock closed yesterday, right? It gaps up first thing in the morning, jumps up here. You’re long the stock, yippee, you’re happy. This is the first minute and then the second minute the stock is up even more to 44.00. What you are looking at now is, are we going to see follow-on buying, like from shorts or something like that, or not? So you have got to look at $42.00, frankly, as this is the Maginot line right there. The bears should not be able to get through this. While the stock closed down here, well below 40.00, you are looking at $42.00 as the area where, if you are still long the stock you absolutely need to be getting out if this extended stock falls below the opening print.
As soon as the stock falls below the opening print that is your indication that there is not enough demand to keep the stock up. So sure enough, boom, within 3-minutes of the open you are completely out of your position and then it never came back all day long (we’ll go to a 5-minute chart so I can do this quicker), the stock just really never came back all day long.
What I am describing here is a situation where, if you are in a stock and it is over earnings and it gaps up and you are happy, have you exit planned in advance. Know that if the stock gaps up, continues to run a bit and then starts to roll over; if the stock starts trading below its opening print that is really your sign to exit the stock and take your profits.
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