Mastering the Open

Gaps Down and Gaps Up

P R E S E N T E D B Y :

Brian Pezim

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DISCLAIMER

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The 4 Horse-persons

-Rising Devil (Gap Down)

-Phoenix (Gap Down)

Little to No Reaction

-Fallen Angel (Gap Up)

-Lead Balloon (Gap Up)
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 Gap Scenarios
After release of news, 4 possible trading scenarios
exist relative to previous day close (PDC) and VWAP:

• GAP DOWN from PDC • GAP UP from PDC

1. TRADING ABOVE the VWAP 1. TRADING ABOVE the VWAP
2. TRADING BELOW the VWAP 2. TRADING BELOW the VWAP

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Gap Down Scenarios

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 GAP DOWN – Trading BELOW the VWAP at Open
The Rising Devil
Criteria
• News release causing move.
• Strong daily chart is best for strategy Open
but not necessary.
• Gapping down on open on bad news.
• Trading below the VWAP at open.
• Weakening into the open best.
Action
• Short on pop back up to VWAP at open.
May drop a little at start.
• Stock may not pop back but continue
selling off at open.
• Stop above VWAP.

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 Open

Gap Down from PDC

Pop on open to VWAP for short entry

Trading below VWAP and

weak into the open

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 Open

Gapping down from $22.5 PDC

Pop up above VWAP at open

- possible short here

Possible add on break lower

Real weakness, some buying
(short covering?) then more weakness
going into the open

Consolidation before another leg lower

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 Open

Gapping down from

$60.14 PDC

Stopped out

Shorted

Trading below the VWAP

Showing some strength going
into the open

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GAP DOWN – Trading ABOVE the VWAP at Open
The Phoenix
Criteria
• News released – could be direct news or
peripheral damage from a company in a
similar sector.
• Gapping down, trading above VWAP going
into open.
• Best if it shows strength in last 5 mins
prior to open.
Action
• Pull back to VWAP at open go long.
• Add on break of high of day possible.
• Stop below VWAP or premarket low.

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 Open

Gapping down on news

Pull back at open to VWAP for entry opportunity

Showing strength into the open

trading above the VWAP

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 Open

Gapping down
Strengthening into open

Pull back but held VWAP

Above the VWAP

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 Head and shoulders pattern
and loses the 9 ema
Gapping down from PDC
$18.55

Trades above the VWAP

at the open

Open

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Gap Up Scenarios

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 GAP UP – Trading ABOVE the VWAP at Open
The Fallen Angel
Criteria
• Good news causing a gap up.
• Gapping up on open.
• Trading above the VWAP.
• Showing strength into the open.
Action
• Go long on drop back up to VWAP at
open or on some bottoming candles
after couple of minutes.
• Stop out on break below the VWAP

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 Open
Lower high and reversal doji

Bounce off VWAP fails –

time to bail

Above the VWAP and

Strong going into open

Pull back to VWAP for entry

VWAP
Gap Up from $44.12 Previous Day Close

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 Double top marked the high of day

Open

ORB to new high for

entry or add.

Tricky pullback at open

dropping below VWAP

Gap up from PDC $158.13

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 GAP UP – Trading BELOW the VWAP at Open
The Lead Balloon
Criteria
• Good news causing a gap up.
• Gapping up on open.
• Trading below the VWAP.
• Showing weakness into the open.
Action
• Short on a pop back up to VWAP at
open or more weakness after open
price action.
• Stop out if it starts trading above the
VWAP.

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 Stock is trading below the VWAP

Getting weaker into

the open
Gapping up from PDC
$42.12
Double bottom indicated price
likely to hold and bounce

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 Trading below the VWAP
Going into the open

Shows strength in the last

few minutes before open
- not an ideal situation

Gapping up from PDC

$62.94
Open

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Factors that can affect price action;
• Short interest – high short (>20%) interest can bring in buyers.
• On a gap up with good news, shorts may scramble to start covering
• On a gap down, shorts may want to start covering some of their positions.
• Market mood – a positive mood in the market can boost buying while a negative
mood will limit upside.
• On a gap up in a positive market mood, buying should be stronger
• On a gap up, in a negative market mood, traders may be inclined to take profits more
quickly
• On a gap down in a positive market mood, downside might be more limited depending on
news
• On a gap down in a negative market mood, downside could be stronger depending on how
far the stock has fallen so far and on the news.

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Questions?

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