Pre-market gapping is a phenomenon often witnessed in the stock market, and it presents numerous trading opportunities for those who know how to leverage it.
This article delves into the concept of Premarket Gappers, explaining its significance, how to identify it, and strategies to trade it effectively.
Understanding Pre-Market Gapping
To grasp the concept of pre-market gapping, it is crucial first to understand what a ‘gap’ in the stock market implies. Essentially, a gap is a scenario where a stock opens at a significantly different price than its previous day’s closing price.
This difference may be higher (up-gap) or lower (down-gap), and it usually reflects substantial overnight activity influenced by various factors.
The Science Behind Pre-Market Gapping
When discussing Pre-market trading hours, it’s critical to understand that the stock market is not a 24-hour marketplace.
Therefore, a lot can happen between a US stocks market’s closing and its next opening that could significantly impact a stock’s price. These are the key factors that usually drive pre-market gapping:
Earnings Reports:
Many companies release their earnings reports after the market closes. If the report is positive, the stock might open at a higher price the next day, creating an up-gap. Conversely, a negative report can lead to a down-gap.
2. News Announcements:
Significant news about a company—like a breakthrough in product development, merger or acquisition announcements, CEO resignation, or a major disaster—can trigger pre-market gapping.
3. Political or Economic Events:
Macro events related to the political or economic environment can also influence a stock’s opening price and cause it to gap.
Types of Gaps in the Stock Market
There are a few different types of gaps that traders should be aware of:
Exhaustion Gap:
This occurs when a stock that has been in a prolonged sell-off gets oversold, causing the price to jump as investors buy the dip.
Runaway Gap:
This gap happens when a stock that has been consolidating for a long time experiences a price jump due to a breakout.
Overnight Gap:
This refers to a gap that occurs in the overnight session due to significant after-hours activity.
The Importance of Pre-Market Gapping
Pre-market price gaps provide a useful gauge of a stock’s potential for price swings. When a stock undergoes a notable shift in value between its closing and opening prices, it suggests that the stock may continue to exhibit significant price movements during the trading day.
It’s worth emphasizing that while pre-market gapping often indicates heightened price volatility, it doesn’t invariably correlate with elevated trading activity.
Identifying Pre-Market Gappers
An efficient method to spot pre-market gapping stocks is by utilizing a stock scanner. This handy tool empowers you to seek out stocks where the opening price for the current day significantly diverges from the closing price of the previous day.
You can refine your search by filtering for the magnitude of the price gap and the trading volume. Looking for stocks with a price gap of at least 1% and a trading volume greater than their 10-day average volume can be a good starting point.
Trading Pre-Market Gappers: Key Considerations
Several factors need to be considered when trading pre-market gappers:
Understand the Catalyst:
It’s essential to understand the underlying reason for the after-hours activity. The impact of the news or event causing the gap can help you decide how to approach the stock during regular trading hours.
Recognize Support and Resistance Levels:
Being aware of a pre-market gapper’s support and resistance levels can provide opportunities to trade reversals or breakouts.
Develop a Trading Plan:
Outline your stop loss and profit targets, and form a clear strategy for handling increased volatility or activity around support and resistance levels.
Pre-Market Gapping Trading Strategies
There are several strategies that traders can employ when dealing with pre-market gappers:
Gap and Go:
This strategy leverages the direction of the gap. You aim to buy an asset that has gapped up or short one that has gapped down.
Fill the Gap:
This strategy involves trying to fill the up or down gap. You can take advantage of this price action by trading on the assumption that the price will eventually return to its previous closing level.
Pre-Market Gapping: A Word of Caution
While pre-market gapping offers numerous opportunities, it’s essential to approach it with caution due to its inherent volatility. Since these stocks are responding to overnight news, trading activity can be swift and unpredictable. Therefore, a conservative approach, especially in the first hour after the market opens, may be prudent.
Final Thoughts on Pre-Market Gapping
Pre-market gapping is a common phenomenon in the stock market that often signals increased volatility for the trading day ahead.
While this can present a wide range of trading prospects, it’s equally crucial to grasp the fundamental factors driving these price changes, stay mindful of support and resistance levels, and adopt a well-defined trading strategy to proficiently handle the inherent risks.
