Chart of the Week to review – iRobot Corp ( Nasdaq:IRBT) from Stockguy22
HOW I TRADE GAP DOWN STOCKS after consolidation
I’ve traded many gap down stocks & someone on twitter ( @StockTrader987 ) asked me about my opinion of buying that first day of a major gap or drop.
What I usually like to do is wait for a few days to a week after a gap down for a few reasons:
1) to make sure i’m not catching a falling knife since many do continue lower after major drops due to :
selling from hedge funds, downgrades after bad news, traders panicking or shorts piling up on board for a further downturn or potentially another gap down in the following week(s).
2) if the stock does not sell off further than I will wait to see if it can start to base ( That’s exactly what we have here on IRBT – Irobot ) . One other thing to note on the chart below is the decreasing volume. That to me is a good thing since it tells me that majority of the sellers are gone. From this point if volume picks up we should push back up and only thing that could hurt is further bad news or a gap down which could wipe out our $24.70 suggested stop.
Once it does base I look to input a risk/reward analysis on a spreadsheet i developed for myself.
Check the charts below and you will see that from this area & using the last 4 day lows we are getting approx 3 -6x what we are willing to risk. I prefer stopping out under whole #’s like $25 ( but not right at $25 — just slightly lower so I chose $24.70 for my analysis)
As you can see the upside from here into the gap is approx 10%-18% ($28-$30 areas) which i feels is conservative
We don’t need the entire gap to fill but if gets momentum could even get as high as $32+ but we’d be happy on this trade with $28-$30.
Try to use this type of strategy on other Gap down’s you see in the future.
I’ve used it very successfully in the past. I may start a position today on IRBT
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Double click the chart below to see the notes & analysis bigger:
Hope you enjoy this type of analysis