Investor Spotlight

Why I Scan for GAP ups

We are heading into the 3rd quarter earnings report with 10% of the $SPY components slated to come to the earnings confessional booth this week. Stocks exhibit volatility and surprises during the earnings report. Quite often, the leading stocks of high institutional quality will gap up in price and attain an all time high overnight. Institutions like hedge funds, pension funds, mutual funds and other professional money mangers are the reason for these gap ups in price overnight. They have the strength of $$$ power to propel these stocks higher. Quite often some of the leading stocks will attain a gain of +20% or higher within days and start consolidating the gains for the next several days or weeks. Most of the high flying stocks that we know of today - $FB, $GOOGL, $NFLX, $AAPL, $CMG, $BABA, $MSFT, $QCOM - started their initial move in a similar manner from their infacy period of new IPO (Initial Public Offering).

IBD (Investors Business Daily) has an '8 Weeks Hold Rule' for stocks that show strong institutional demand. The rule suggests that if the stock attains a +20% gain or higher from its proper buy point in less than 3 weeks, one should hold it for 8 weeks and evaluate the stock at that point. Mr. William J. O'Neil (founder of IBD) found that quite often such stocks continue to make higher gains after attaining the explosive gains of over +20% within a short period of time. Demand from the institutions is so great that the stock gets propelled higher from the sheer size of the demand from the institutions. Institutions often curb their enthusiasm for the stock after attaining high price so quickly just so as not to exhibit their intentions of wanting to acquire more of the stock.

$CDLX Story

Institutions quite often will take a position in several leading stocks in the same group. It's their way of exploiting the profit potential that the leading stocks in a leading group (top 5 out of the 33 groups IBD has grouped the stocks in their data base) presents. Retail investors that have learnt and acquired the skills of reading and deciphering the stock charts, can easily identify the intentions of the institutions by looking over the price and volume movements in a stock. Following is a quick synopsis of How I view the stock chart of $CDLX - a new IPO - that is a leading growth stock. It is amongst a company of very successful stocks such as $PCTY (+300%), $PAYC (+300%), $SHOP (+350%), $COUP (+400%) gains in the past 2 years. $CDLX has gained +494% in the last 8 months since May 9th 2019.

Stock attained a resistance of $19.64 trading less than 200,000 shares daily on Mar 4th 2019. It's considered a very thin stock at this time, trading less than $1 million (share price x volume shares traded daily).
Stock breaks out from earnings report from $19.64 resistance point on May 10th in volume that was 6 times the daily average volume. This is the first early sign of institutional interest in this stock. It attained a gain of +20% within 4 weeks. Stock chart exhibited a very bullish technical setup when the 10 day sma (simple moving average) and the 20 day sma crossed over the slower 50 day sma.
July 3 rd, the stock is trading close to $30 with over 300,000 shares changing hands daily. This is 9 times the daily dollar volume compared to just 4 months ago. This is another confirmation of institutional interest in the stock. It is still considered too thin a stock for retail growth stock investors that follow IBD principles.
August 8th, the stock gaps up +20% from the earnings report and punches through the resistance at $30.38 in volume that is 4 times the average daily volume. Stock is no longer considered thin. The stock continues to move higher and gains +20% from the buy point of $30.48. This invokes the '8 Weeks Hold Rule'. This stock should be held until mid October and reevaluated at that time.
November 12th, the stock once again gaps up +43% from the earnings report in volume that is 12 times the daily average trading volume. This is a massive volume and clearly a sign of tremendous institutional demand for the limited number of shares available in the market. It punches through the buy point of $42.17 and once again invokes the '8 Weeks Hold Rule'.
Stock begins to consolidate because the institutions are taking a little break and they try not bid up the stock too much. 10 day faster moving sma and the 20 day slower moving sma began moving in tandem for the last 3 weeks in December in a very tight and an orderly manner. This is a very bullish technical signal for an additional entry in a stock.
December 30th, a stock position was initiated at the market open for $64.88. There are only less than 15 million shares available for this stock and institutions continue to exhibit the demand for this stock. The stock once again gapped up +25% on January 13th.

Making +25% gain in a stock within 2 weeks was accomplished by stalking the stock that gaps up during earnings and patiently waiting for the stock to attain a volume strength.

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