Figuring Out Gaps | Podcast Episode #333

0:07
Hey, I’m Ryan Mallory. And this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex ever-changing, world of Finance, learn what it means to trade, profitably and consistently managing risk, avoiding the pitfalls of trading. And most importantly, to let those winners run wild, you can succeed at the stock market and I’m ready to show you how, hey everybody, this is Ryan Mallory with swing trading the stock market.

0:33
In today’s episode, we’re going to talk about some gaps gaps with your stocks gaps higher gaps, lower gaps. When the Stock Market opens gasps when the Stock Market opens the next day, and the day after that, we’re going to spend this whole episode talking about gaps.

0:49
So as usual where I guess most of the time I’m making my episodes based off of your emails, your questions and provide a my answers last couple episodes I did not do that. I actually just went off at some things that I’ve been wanting to talk about for a while and I highly recommend that you go back and listen to them one of them.

1:05
Is called is the stock market stupid, which is a good one to listen to. In the other one is, is shorting dead. So I recommend going back listening to those two podcast episodes, I think you will find them worthwhile. Now today’s episode, we’re going to take an email from a person named Beatrice, that’s not the real person’s name.

1:24
I just gave him a Florida redneck name to conceal their identity to save them from any embarrassment if they might find and having their real name being used. Don’t want to cause any of that. So, Beatrice rise. Hey Ryan, I love the And I’ve been listening to it for over a year and then swing trading for a few years but I’m trying to get more focused about it.

1:41
I’m curious about Gap ups and GAP Downs. Today May 30th these stocks had significant gaps, higher, Wayfarer stock symbol W. Riot stock symbol are iot and sky and you co had a gap down. Sometimes these gaps correspond with earning reports other times.

2:00
They go. The opposite direction of their earnings reports. Is there a technical analysis strategy that Hopes to identify these before they happen. Thank you for taking your time to answer this, sincerely, Beatrice Fort Worth, Texas. All right, beaches, good question.

2:16
We’re going to answer. We’re going to start right now. Let’s talk about gaps. First of all gaps, probably caused me more concern than any other aspect of trading. Why is that? Because gaps can render stop losses? Useless? Think about it. You buy stock ABC at $100 a share and you put your stop loss at 95.

2:35
Let’s say overnight they have a really bad headline. Let’s say the CEO steps down for fraud or because of some unexpected news event that takes place and then all of a sudden, the stock opens up at $85. Are you going to get stopped out at 95 anymore?

2:50
Nope, you’re getting stopped out at $85 and that sucks. Now I haven’t really had any like disaster. You know scenarios ever unfold from you in trading because of a gap lower but the possibility is always out there and I’m very Careful about what stocks I trade because I realized this and I realize that my stop losses aren’t going to be worth anything.

3:11
If there’s a significant Gap below those stop losses. I think a lot of people think that somehow or another that if they have a significant Gap blower that blows through their stop loss. Before the market, even opens that they’re still going to get stopped out at where they had the order at and that’s simply not true.

3:26
It’s usually a newbie assumption about the stock market or you’re going to get out, is where the buyers are at and what the highest price that a buyer is willing to buy if you get stopped out. So it’s important to avoid stocks or events that could cause a huge gap against your position.

3:54
And a lot of times your stocks that you’re trading when they have earnings report that comes out. It’s usually going to have a gap of some kind. And so for me, my number one trading rule is I’m not going to hold a stock. Earnings, I get the feeling based off a lot of the emails that I get that.

4:09
A lot of people ignore that particular rule that I have and my trading. They Don’t Really apply it to their own. I think people like that action way too much to give up the earnings report. People like to trade options. They like to do straddle option, plays, they like to just buy the stock outright and hope that you just get a massive Gap higher.

4:28
And when you see stocks like Nvidia, that what was it like, 27% exact higher, Yeah, that’s going to attract a lot of people to want to play earnings. I bet you there’s a ton of people that plays Nvidia at the next earnings report. Why? Because of what it did at this particular earnings report where it gapped up in a monstrous like fashion.

4:47
They’re going to hope that history repeats itself and they can get more of the same. I’ve noticed that with meta of late, I’ve noticed it with a lot of the Fang stocks. If you get a couple of things stocks let’s say Netflix beats and then meta beats and Tesla piece and they get these huge gaps higher well guess What people are going to start trading, Microsoft, and Google, and apple, and Nvidia, hoping the same happens with those as well.

5:10
And so yeah, I don’t think a lot of people follow me on that whole notion of don’t trade earnings because they’re wildly unpredictable.

5:26
You mentioned Wayfarer Riot sky and you see. Oh, sometimes these corresponds earning reports other times they go opposite. The earnings reports. And I think what Beatrice is talking about here is that the stock will be the earnings estimate, and then it’ll sell off or it will miss it, but then it’ll rally and why is that?

5:45
Well, sometimes they’ll have a really bad earnings report, but they will guide higher, they’ll say, hey, we missed this particular quarter. But we think that we’re going to be our next quarter earnings by a fifty percent. And so, the market loves it when they raise guidance or they increase their Outlook, in terms of how much they think they’ll bring in on an earnings per share.

6:04
R basis. And that’s a lot of what you saw in Nvidia. I think they were expecting and I don’t hold me to these numbers but I think they were expecting like seven billion dollars and they came out with 11 billion in the market like really just lost its mind and just kept growling. It’s been running ever since but to think that you can consistently predict the outcome of our earnings report is really foolhardy.

6:26
I don’t do it. That’s why I don’t trade Rings If I thought I could predict on a regular basis, exactly how their earnings was going to turn out for, Individual stocks. I’d play it but I can’t. And to be wrong. Can be a disaster. I mean, you look at AAP just the other day. They go from being just below. 100 all the way down into the 60s.

6:44
I’ve seen metaphor instance, I see metal lose over 20% from earnings report, we saw it all throughout 2022, with Netflix, with Google with Amazon. They can miss in a big time way. Even if they’re beating or if they’re rallying off of their earnings, nine times out of ten, it takes one time for it just to Completely set you back for you to lose all of your profits off of one bad earnings report.

7:08
There’s so many variables that goes into the earnings report. This past earnings season, we saw all this talk about AI, o is almost like the more that they mentioned AI in their earnings report. The more, the stock went up, it didn’t matter how their earnings work if they mentioned AI, or they mention, they were pursuing new product centered around AI, the stock went crazy, that’s what you saw with Microsoft.

7:27
That’s what you saw with Google and they know it. Hey weren’t thinking like saying it’s something like we’re 50 times in their earnings report. It was Crazy. And sometimes there’s not a reason why it sells off. Sometimes it just rallies to harden to earnings and its price for Perfection and it sells off people take the profits. It just did it. Blow them away their earnings report and sometimes it rallies with like, I remember em used the stock symbol mu Micron.

7:48
It did not have a good earnings report. And yet somehow, the stock managed of bounce back. I saw one headline today was phenomenal, took a picture of it, just because I thought it was such a good example. For today’s podcast, this is a headline from MarketWatch has said Del stock jumps. After early earnings release shows, largest sales decline on record, but still beats expectations and then a little bit more on the article.

8:11
It says those earnings and revenue plunged in the fiscal quarter but easily beat expectations admit the largest downturn for PC sales ever. There’s so much working against each other and just that brief description and headline there. And yet, it talks about how Dell has seen a huge decrease in sales year-over-year yet.

8:31
If you look at the stock price over the past year, it’s Actually higher than it was one year ago and that kind of goes back to the whole is the stock market stupid. Yes, it can be very, very stupid. But the whole point of what I’m trying to say here is that if you expect earnings to make sense, a lot of the times, it does, if it’s a rule, horrible quarter and they would guide lower more than likely, it’s probably going to sell off.

8:54
That’s what I would expect. Okay. But not always. And it’s those times that catch you, by surprise. That doesn’t do what you expected to do. The throws you for a loop that really blows through your cap. Capital because you’re taking now, a huge gap lower because you chose to play earnings, but there’s other causes that gaps to and we’re not just talking about earnings here.

9:12
The market can have massive gaps, higher and lower based off of economic news. If there’s a strong jobs number, it might Gap higher. Or if we’re in a bad news is good news environment. We want there to be higher unemployment and then that might cause the market the Gap higher.

9:27
Remember back in 2011 and it’s relevant to right now because we’ve been talking so much about the debt ceiling. And remember when United States got downgraded their Rating was downgraded. And I think the market was down like four or five percent that they don’t quote me on that again. I didn’t go back and check the exact numbers but it was a significant significant sell-off and sometimes, you look at a stock like, Nvidia in your holy cow.

9:46
How high can this thing go? It just gapped up 30%, and then a couple days later, it, caps up again and we hear about things like exhaustion gaps, continuation, gaps, and how do you tell the difference and it’s very difficult to. You really have to take a wait-and-see approach. Most of your gaps get filled, but the smaller the gap.

10:04
Gap. The easier it is for to get filled when you have Nvidia going from like 30 5, all the way up to 385 overnight, that’s going to probably be a lot more difficult Gap to fill in the same day. Do I think there’s a good chance that it’ll fill sometime down the road? Yes. But it’s probably not going to be that same day.

10:20
Now, when you do get a big gap fill because of obviously a large gap higher, I think those are a lot harder to fill, but the reward potential is so much greater and a lot of people will play those, but most of the time, they will lose on those huge gap. Because they just don’t usually fill the same day and if they do, it’s usually because they’re falling with the rest of the market again.

10:41
Not impossible that a big gap, higher gets filled, but I think it’s much more difficult for them to be filled than a small Gap, small gaps, tend to get filled really quickly oftentimes the same day. And what I ever just try to fade the Gap, right? At the open know. And I think I think it’s a very overcrowded trade in general, I think a lot of people try to play the gaps each and every day and so it’s very overcrowded and Weebly not really worth trying to just make a whole trading strategy based off of fading gaps higher and lower.

11:09
However if I was to play when I definitely would have played in the first three minutes, I think there’s too much risk. I think there’s too many moves that are made in that first 30 minutes even to the first hour of trading that are not reliable, they’re just very basically like the market Heaven, spasms, half the time but often times if it holds the Gap after the first 30 minutes and it looks like it’s going to ride and then it starts to sell off in a breaks that for 30 minute low.

11:31
There’s a good chance that it will make a run. And fill that Gap. Or if it’s after the first hour, some people will wait a full hour for it to do that, but I at the very least would be waiting 30 minutes before I would be trying to fit a gap and even that like I said, I think it’s that overplayed trade. I think too many people play it.

11:47
Yes. There’s some money that can be made on it, but do I think there’s better trading strategies out there? Yeah. You also have overseas news that can affect the market quite a bit. If we’re tied to what China is doing or if we’re tied to what Europe’s doing, or we’re looking very closely at their price action murder like the Greek banking crisis.

12:04
I mean, that was something that was creating a whole bunch of problems for the market. China reopening was creating a lot of bullishness for the market and so you can get huge gaps, higher and lower off of that. But in the end, he says, is there a technical analysis that helps identify these gaps before they happen?

12:20
No, I think it’s more like you need to have a good understanding of what’s causing the gaps and what could be a potential cause for a gap in the next day or the next two days. For instance, famous ons coming out with earnings. There’s a good chance that it’s going to Gap and Coming out with earnings good chance. It’s going to get probably would be staying away from that if there’s a biotech stock that’s going to have a major FDA decision and it’s pretty much the only drug that they have and they have to have it or they go bust.

12:45
Yeah. There’s going to be a significant Gap to something like that whether for it’s better for worse. There’s going to be a gap or some stocks that I won’t trade because they got too much F. SLY is one of them Boeing had a lot of headline risk for a long time. I’m headline risk can be huge causes for gaps, higher, and lower.

13:01
And when Boeing was having a lot of issues with their aircraft If I did not want to be swing trading their stock overnight with the potential that some other defect or problem would arise with their airplane because it was causing huge gaps to the downside and you hear about these exhaustion gaps and it usually that comes as a result of these runaway gaps to just keep happening every day.

13:20
We look at like two or three percent because the momentum is so heavy with it. We saw with a lot of the Wall Street bets and that phenomenon and then you will also see a of late here with Nvidia and a lot of your semiconductors and you’re AI place. But then it starts to get A point to where there’s numerous gaps and then you get almost parabolic on the chart and you get what they call a shooting star candle where the candle body.

13:42
That’s the difference between the open and the closing price is very thin but you have a upper Shadow which is how high the stock went that day which is very very big. They call those a shooting star candle pattern and that can often times in conjunction with a gap higher reflect on the possibility that the market is finally running out of gas or a stock.

14:04
Running out of gas, but was not running out of gas. Is swingtradingthestockmarket.com, guys. You guys sign up for this thing, it’s really good. You get all my stock market research each and every day that’s going to include updates on the S&P 500, the NASDAQ, the Russell 2000, the vix. You’re also going to be getting updates on all of the big tech stocks like Facebook.

14:22
Or if I guess they called meta now but meta, Amazon Apple, Netflix, Google, Microsoft, Tesla, and Vidya, I think that’s the big 8 that I like to cover. And then I’m going to be giving you my daily watchlist, weekly wash, The list and also some, some intriguing ideas that might come across my plate each and every day.

14:39
So check that out. swingtradingthestockmarket.com and you’re supporting this podcast in the process. But Invidia, we talked a lot about Nvidia of late and I’m pulling up the chart here. That’s why you hear the clicking in the background. We talked about it goes from like, 305 2385 390. I think the following day, it closed around 390 and then the next day it gaps up the 400 or so runs up to 420 and then comes back down to 400 to close out the day.

15:04
Actually gapped up to about 40 50 and closed around 400 that particular day. And then the next day, guess what? It does. It starts to sell off, it goes all the way down to below 380 now the following day it bounced up. But nonetheless, it did fill some gaps and they worse much smaller gaps than the earnings Gap that it had from, just a few days prior still hasn’t filled that Gap as of this podcast episode, and has even got close to trying.

15:29
So, talked about headline risks as being a cause for The Gap, the earnings gaps, the Away gaps, the exhaustion gas. We talked about economic news impacting the market also affects stocks as well. Overseas news, you get government news, you get FDA news. There’s a lot of things but in the end, you can’t really predict gaps.

15:47
Why? Because if there was a consistent way to be able to predict when the gaps were going to happen, there wouldn’t be any gaps. That’s a deep thought, right? Why? Because the market would already be pricing in ahead of time, during regular trading hours, the Gap that was going to occur the next day. Thereby not.

16:03
Causing a gap, it would just run to that price level. So that would be my take away on the day if we could predict price gaps with there, even be any price caps. So, usually it’s because it’s such a big surprise or shift in sentiment from the day prior, and clearly, if you have a different sentiment from the day prior, that means it wasn’t expecting or planning on any gaps to take place.

16:26
So there you have it. That would be my thoughts on caps and I told you we’re going to talk the whole time about it. Hopefully you took a little bit away from this thing. Uh, if we got a little bit of knowledge added to your trading repertoire, if you enjoyed this podcast episode, I would encourage you to leave me a five star review. People ask me what are you drinking these days on this podcast?

16:43
Well, this particular one here, I drank Woodford. Double oats always pretty good. You can get it at Costco, as you can get it, free cheap. Very easy to find. It’s probably about $50 a bottle or so, but really good safe play. And make sure to keep sending me your questions ryan@shareplanner.com.

16:58
I do read them and I try to make podcasts out of his, many of them as I possibly can. If it’s a good question, Certain that I’ll make a podcast out of it. So keep sending them to me make sure to check out swingtradingthestockmarket.com. Leave me a five star review. Thank you and God bless.

17:14
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17:32
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