Gap  Ups

Buy  High  and  Sell  Higher

If you turn over 10 stones, you might find 1 attractive investment idea but if you turn over 100 stones, you might find 10.

By Peter Lynch (Manager of Magellan Fund 1977 - 1990)

We shall be heading into the 4th quarter earnings report with 10% of the $SPY components slated to come to the earnings confessional booth in about 2 weeks.  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. 

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.  

As a Growth Stock investor and a trader that follows IBD (Investors Business Daily) style of investing, one must:

  "Buy High and Sell Higher"

It seems counterintuitive but that's how one attains double digits and triple digits gains in a Growth Stock.  As a standard practice, I always prepare a separate watch list of stocks that have gapped up in volume during earnings report.  Sometimes stocks will gap up from mergers and acquisition as the  $PTON  did last week.  I had mentioned this stock in my blog post of Sunday December 20th.  Initial stock position was established at it's buy point of $139.75 on Monday December 21st.  It gapped up the next day and is currently +14%  in 3 days.  Currently it's trading above the upper Bollinger bands and will likely retrace in the coming days to consolidate the gains.  

Performance of Stocks That Gapped Up

To illustrate the power of gap ups, here are the results of some of the stocks that were on my Gap Up Watch List.  April 3rd was the  "Follow Thru"   day after the brutal downtrend we experienced with the March 23rd lows on the  $SPY  and  $QQQ.  These results are year to date from the  April 3rd  "Follow Thru"  day.  Stocks that are bold faced are the stocks currently in my portfolio.  Some of these stocks could possibly provide an opportunity to scale up if they retrace to the 50 day sma (simple moving average) and the institutions support them at that level.  Concentrating your portfolio to just a few leading stocks is the true way to attain out size gains with the Growth Stocks.

1. $AMZN   ... +66% (Mentioned Blog post 6/28 and 9/13)
2. $CELH    ... +1071%
3. $NIO       ... +1807% (Mentioned Blog post 10/29)
4. $PDD      ... +119%
5. $PINS     ... +414%
6. $PYPL     ... +158%
7. $PTON     ... +469% (Mentioned Blog post 12/21)
8. $RH         ... +458% (Mentioned Blog post 10/22)
9. $SNAP    ... +353%
10. $TTD      ... +480%
11. $ZG        ... +295%

Happy Trading!

Amin