Trade Opportunity of the Week: AI Gapper | November 23th 2024

The Trade Opportunity

The purpose of this weekly article is to analyze the top trading opportunity of the week. To improve our identification and execution of high quality trade ideas that meet our setup requirements.

Each article will focus on a stock that meets one of three of the main categories of setups I trade:

• Range Breakout / VCP / tight area breakout
• Pullback to Support/ MA
• Gapper

These articles are like taking a step into the batting cage and loading up a historical at bat from a Ace pitcher in the world series – they will help you prepare and execute in future situations by studying important moments from the past

Be sure to review my previous article covering the BE Gapper Setup

Here were the setups I considered covering this week that are also worth reviewing

DUOL 21 ema pullback

IOT 50 sma pullback and base re-breakout

RBRK 21ema pullback upside reversal

SG tight area reversal rally and re-breakout

DDOG tight area breakout up the right side

I decided to focus today on AI- a gapper and breakout on a news catalyst of a further partnership with MSFT.

Monday morning they announced the news: https://finance.yahoo.com/news/c3-ai-microsoft-forge-strategic-133000918.html

Weekly Chart – this was one of the first movers in the AI theme and had been consolidating for quite some time

Discovery

Before you can trade a stock you need to know it exists. To get this one on your radar you would have to build it into your routines to track gap ups in post and pre market

To do this you can use something like my dashboard setup in Deepvue. I have screens that look for gap ups and down and then take a look an intraday price action.

With each gap you need to consider the quality of the catalyst, increased partnership announcements surrounding AI have been well received by the market recently

My pre-market Deepvue Dashboard:

Once you noticed the AI gap and looked at the news – it would have gone to your daily focus list for monday to look for a potential entry

Setup and Execution

The Setup for Ai was a gapper

This is the same as we discussed for BE – For gappers the key is to find a spot to manage your risk tightly and look to have a good cushion into the end of the day. For these they are often volatile and you need to size and manage risk to maybe give them a shot multiple times if you are stopped

For me usually this occurs

1. Right at the open, using the LOD as a stop – looking for immediate demand
2. Very close to the open on an opening range breakout, or mini base and rally
3. within the first hour-two on an intraday constructive base

For Gappers I may watch the first few minutes on a 1-minute to gauge demand, but I want to get to the 5 min and 15min timeframes shortly thereafter

To catch AI on the day of the gap you would have had to have executed right near the open and be focused on it.

An entry right as it pushed from the open would have worked with a stop LOD would have been about 2% position risk or 0.5% of your portfolio using a 25% position size

An entry at the opening range breakout would have been about 3% risk to the low of the day or 0.75% of your portfolio with a 25% position

An entry on the AVWAP reclaim with a stop at the low of the mini base higher low would have been again about 2% risk or less.

After these opportunities AI did not really let you in. It trended strongly from the open and closed the day up 24%, about 16% from the possible entry points

5 minute chart of the whole day:

After Day 1, AI did not offer up many great low risk spots. Day 2 it pulled back in but you likely would not have had cushion to hold anything.

5 minute:

However on a daily chart it looked prime for reconfirmation on Day 3

Daily Chart:

During Day 3 you had an initial pulling before a good close, and it would have been actionable on a pullback buy and rally from the day 2 high. You would have had about a 7% cushion going into the close, enough to hold and move stops to breakeven

Trade Management

From this entry you would have had a bit of pressure on day 4 but likely enough cushion to hold. AI closed great friday and the week and you would have been at a solid ~15% profit, +30% if entered on day 1.

At the close friday your stops should be at least in the money and swing traders would likely be taking some off

Early next week you should be prepared for a potential stress test and retrace. You would have a good cushion to work with so you would want to plan out how you would handle such an event.

AI is a very fast mover, more suited to swing than position trading, but has a new catalyst and could be starting a new trend.

Constructive action would look like mini bases and pullbacks and then reconfirmations up.

Non constructive action would look like a big negative reversal lower undercutting friday’s low in which case traders should consider cutting and re-evaluating.