How Price Gap Breakouts on Stock Charts Return Over 100%
Posted by Blain Reinkensmeyer
September 11, 2007 at 7:19 pm
Price gaps can lead to huge advances when they are used as the breakout point on a stock chart. This post will give visual examples of what they look like and what to look for after the price gap breakout occurs.
Note: New Traders feel free to refer to the following stock education posts before reading on:
- Stock Charts, Understanding the Basics
- Volume Interpretation with Stock Charts
- Stock Chart Resistance and Support Example 2
- Volume Interpretation Quiz. (Answers)
- Stock Chart Education, Test Your Knowledge. (Answers)
- Analyzing the Overall Market For Dummies
Stock Chart Examples
Crocs (CROX) in early May, 2007 and the stock went from under $30 to over $60 (split on 6/16/07) in three months. Today the stock is setting up for what could be another breakout and the start of another long term move to the upside. The major points to take note of on this chart:
- CROX broke out on a price gap, the volume was the heaviest of 2007. This means that institutions were strongly supporting the stock.
- After the breakout, CROX kept distance between itself and its 50 day moving average (the blue line) but never pulled to far away. This is important to maintain the duration of the price advance over time.
- Big price advance days from the breakout on all came with extremely strong volume. Nothing shows more weakness than a stock that breaks out or moves up on weak volume.
Amazon.com (AMZN) gapped in early April, 2007 and the stock since has moved over 100% from $42 to as high as $89. Today Amazon.com is setting up for what could be another break to new highs. Major points to take from this chart:
- When Amazon.com originally broke out above $43.25, it was on well above average volume. Institutional support would show here and again even stronger two weeks later with the highest volume day for Amazon.com yet in 2007.
- Since the breakout volume was been huge numerous times as the stock has continued its advance.
- Amazon.com has yet since the breakout to trade under its 50 day moving average for more than two days.
Apple (AAPL) gapped in late April to break out of a base and since has moved up around 40%, trading now above $140 a share. Apple since has begun to built a new base and looks to potentially break out to once again to new all time highs. Apple has had some shaky pockets of price volatility during this move but overall has held up nicely.
There are many more examples like these, and really they give a great representation of the possibilities behind a simple price gap breakout. If you enjoyed this technical analysis make sure to give my article on bullish engulfments a read, you’ll enjoy it.
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Great post on a profitable pattern. Do you ever trade these intraday?
I’ve messed around with gaps of all sorts whether they are to the downside or upside. The added price volatility makes usually for some easy money. You?
It’s my bread and butter if I’m day trading. You could probably make a living off that setup alone. Trade gaps the first few hours then go do whatever…nice life
lol
What type of intraday indicators do you use? Ill typically rely on RSI and MACD alongside support resistance from key chart poitns like the moving averages.
Price, volume, support/resistance and moving averages.
Blain,
Great post with excellent chart examples. Gaps play a large part in my trading decisions both at the beginning of a run and during a possible breakdown when they are looking to fill (usually many months later, if not years).
Chris
With regards to CROX, how do you decide if it’s a breakout candidate or a bearish double top?
If you take a look at CROX on a weekly this current base is the 3rd or 4th of its run since 2006. So, technically according to CANSLIM the stock may see the end soon. As for getting bearish on the stock overall though I will look for either a failed breakout, a heavy sell off through the 50 day, a climax run, railroad tracks, a exhaustion gap, something technically that tells me the stock is nearing the end of its run.
Great article. In regards to gaps, I understand that stocks can breakout above gaps, and I have also understand that stocks tend to fill gaps back in. In the case of CROX that would have resulted in a pullback. Right now I am long Nutrisystem(NTRI), looking for it to move higher as it fills in its recent gap down. When can you anticipate continued movement as opposed to a reversal filling in the gap, and what are your thoughts on the Nutrisystem chart?
For NTRI I would definitely wait to get in when the stock breaks past $59 on heavy accumulation volume. Right now you have resistance from both the 50 and 200 day moving averages, alongside the gap range. You can’t really “anticipate” gap ranges to fill in my opinion, what I do is watch for significant moves on heavy volume and react accordingly.
Thanks Blain! I am already in NTRI, I was looking at 58.50 as a breakout point. Was your suggestion of 59 based on confirmed breakout above resistance at 58.50, or am I not reading the chart the same as you?
Thanks for your help!
$58.50 would be perfect, I was just rounding up
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