How to mind the gap

Some advice for dealing with the sudden price changes that can hit a stock.

By Kim Peterson Sep 22, 2010 2:57PM
Gaps are always interesting on a stock price chart. For whatever reason, something happens that causes a price to suddenly jump up or down.

Often, that occurs when a company announces good or bad news after the bell. The next day's trading opens with a gap, and some investors strategize around it.

Investopedia has a nice breakdown on how to play the gap, and describes the four gaps that are often seen. Some show up at the end of a price pattern, before a new trend breaks or in a last-gasp attempt to jump higher or lower.

When a gap returns to its original price level -- as many of them do -- you can say the gap has been "filled," according to Investopedia. When this happens on the same day, it's referred to as "fading."

So how do you mind the gap? Investopedia offers some ideas, which I'll summarize here:

  • When positive earnings reports are released after-hours, some investors will buy immediately in hopes of a gap the next trading day.

  • If you're canny enough to sense the beginning of a price trend, you can buy at the first sign of a gap and hope the momentum continues. On the other hand, you can watch a gap ride all the way up and try to short it at the peak.

  • Once a stock starts to fill, it doesn't often stop.

  • Watch trading volume as well. High volume can signal the beginning of a new trend, while low volume might simply mean that the end of the pattern is near.

  • Make sure you have a safety net in place by using a stop-loss.

Investopedia has more here.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.