One premise of Technical Analysis is the price gaps get filled. One thing we don’t know is when. Two recent price gaps have caught my attention and in my opinion are worth creating an alarm and closely watching over the near term. Price action will tell us if we have a bullish or bearish play to make.
Dick’s Sporting Goods ( $DKS )
Traders responded positively to Dick’s recent earnings call by gapping up $8. The stock has pulled back to support at $35. A pull back after a big gap is common and is not in itself a bearish signal, but if price were to close below $35, then a move back toward $30.50 to close the gap would be favored. If $35 holds, then its a bullish set up and traders can stay long above $35.
The Trade on $DKS
Watch Price carefully over the next several days. If price holds above $35 and moves higher, Traders can get long with an initial target of the recent high at $39. A nearby stop could be placed at $34.75. If price settles below $35 on a closing basis, I’d be a buyer of puts targeting a move toward $30 over time. I’d target the July 35P which gives the trade a little over 6 weeks to play out. I’d be looking to set a stop at $35.25 – $35.50 level.
Annotated Daily Chart on $DKS: http://schrts.co/oyCsxV
henahealth ( $ATHN )
In early May $ATHN gapped down $15, then a week later gapped up $20. Since that time, price pulled back to support, then re-tested the high and failed. Price is now coming back for what looks like another test of support at $147.50. On the PPO indicator, we can see there has been a bearish crossover.
The Trade on $ATHN
Similar to the ideas laid out on $DKS above, if price holds at $147.50 the set up remains bullish. If on a closing basis price settles below $147.50 a price move to fill that big $20 gap is favored. Long or short stops should be placed on either side of $147.5. Thet’s your line in the sand.
Annotated Chart on $ATHN: http://schrts.co/m1nHFE
What I like on these set ups
The key on these set ups, and something I look for in any trade, is a clear line in the sand letting me know I am wrong. In both cases, the support line is clear. There is no need to guess. If price stays above support, bulls are in control. If support fails then bears have an opportunity to push price down to close those gaps.
Good Luck and hope it helps!