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.