It's been a rough start of the week here. Fortunately, it isn't due to the market, but a nasty head cold instead, which means I'm doing very little trading.
I did pick up Exxon Mobil (XOM) today for a swing trade as the setup I was looking for triggered at the close yesterday. I'm long at $84.35, so down a few cents already on the day. But my stop is at $82.45 on this one and I'll follow the pattern I laid out yesterday.
These are the days I'll use to do a little research and back-testing. Previously, I covered buying gap-down names looking for reversals. Today, I'll touch quickly on some work buying the gap-up names early in the day looking for a continuation play. First, I'll start with the pretty chart. But don't get too excited, there are plenty of ugly ones, too, with this approach.
Esperion Therapeutics (ESPR) took off higher this morning thanks to some good Phase II data. While I took a quick look at the press release, this really wasn't a big interest for me since this trade would be purely technical in nature. I use 5-minute charts for these trades and I never trade the first 5-minute bar. In fact, the first 5-minute bar is for information and to eliminate a few potential setups.
The gap I'm looking to trade is a stock 4% higher than the previous close after the first five minutes of trading. Furthermore, I want stocks that are $10. The bigger the volume, the better, as well. A stock gapping up 5%, but only seeing a few trades in the first five minutes, is not one which interests me. Also, I limit myself to no more than seven gap-ups. On a strong market day, the number would likely be too great for many traders. I know it would be for me. For a stock I have familiarity trading the past, I may drop down to a 3% gap, but that is simply a personal preference.
So ESPR fit the bill. There isn't anything more than this. No RSI, stochastics, MACD, MFI, etc. I simply am looking at price. Once in the trade, the rules do expand a little. In terms of price, I don't want to see the lowest low from the first two bars of the day broken on a closing basis to the downside. That's a stop. The RSI should be in overbought territory from the open and that's fine. What I don't want to see is the 8-period RSI drop out of overbought territory. That's a yellow flag. The Psar should also be in buy territory. When it flips to a sell signal, that's another yellow flag. There are strong price moves, so I want a short-term moving average on here like the 3- and 10-period moving averages. If the 3 crosses under the 10, then that's a yellow flag. Lastly, I want to look at a shorter-term slow stochastics (8,3) here and when both the %K and %D cross under the 80 level, that's a yellow flag.
Simply put, two yellow flags signals to close AT LEAST half the position and three or more puts me out of the stock. Otherwise, I continue to hold until the end of the day. For ESPR it worked well, as the stock ran from $83 before signaling an exit at $90.
DSW (DSW) also had a strong opening. The stock was volatile from the get-go, with a fairly ugly second 5-minute bar, but still, this one qualified for a buy. The next two bars were lower, but they did not close under the lowest low of the first two trading bars of the day. DSW then rallied and it looked like maybe this was a good hold after all. But by 10 a.m., there was already one yellow flag. Only 10 minutes later a second one hit and it was time to exit half the position with a small loss. Within the next 10 minutes, there was another yellow flag, the third of the morning, and the disappointment with DSW was complete.
It was time to put this one back on the shelf and accept the loss. The stock did bounce a bit before sinking to new lows, lows even lower than that second 5-minute bar after the open, so I would call this one a good loss. No, the trade wasn't optimal as a small profit could have been had, but it would have required perfect timing and a lot of luck, even more luck than an Irishman on St. Patrick's Day has.
Of the seven that hit my screens this morning, only five qualified for buys with two having closed for profits right now, two still on the books but green at the moment and DSW as the glass slipper that shattered what could have a been a Cinderella gap-up trading morning.
Can you beat TheStreet ... at basketball? Jim Cramer and our Wall Street pros are posting their brackets on ESPN. Take them on at www.thestreet.com/espn, password: Thestreet2015