Trade Opportunity of the Week: DOCS Post Gap Setup | December 1st 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 / Post Gap Setup

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.

The setups we cover will appear again and again in each market cycle

So far we have covered recent examples covering trading Day 1 or a short range in days after the gap:

Be sure to review my previous article covering the BE Day 1 Gapper Setup
Be sure to review my previous article covering the AI Day 3 Gapper Setup

This week we will be discussing a setup that can occur after a stock pulls back post gap with DOCS.

It setup a range against the 21 ema after a strong gap and broke out nicely up almost 10% on Nov 26 and looks primed for higher.

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 setup a watchlist of recent gap ups and power moves.

I track this watchlist and always review it for potential setups, I include the list at the bottom of my daily reports for you guys. Below was from the November 24 report, the day before it broke out of the range

Setup and Execution

The Setup for DOCS was a post gap pullback into the 21ema where it set up a tight range – with RMV5 going to 0.

On a weekly chart It is also a recent new stage 2 uptrend, and the first one after its IPO institutional due diligence phase – often a great time to look for daily setups and base breakouts

For a post gap pullback setup I look for

1. Supportive action at the 10ema or 21ema area
2. Confluence with another significant level like the gap up low or base pivot
3. Ideally lower volume on the pullback

After I identify the setup I would look to use one of the 4 ways to trade ranges to enter. These entry tactics allow you to execute while minimizing risk.

In this case you could have used a combination of the undercut and rally of the prior day low and then also added/entered through the range breakout

Daily Chart:

On a 65 minute timeframe it’s even more clear. The Range breakout is basically a stage 2 breakout but on the lower timeframe

The stop for the prior day low pivot would have been the day’s low about 1% risk

The stop for the range breakout could have been the prior day low – about 2.5% risk

Either of these would have allowed for solid position sizing:

With 2.5% position risk you could size to 20% position of your portfolio and risk 0.5% portfolio (or 40% size risking 1% of your portfolio)
With 1% position risk you could size even a 50% position and still only risk 0.5% of your portfolio.

1% risk is typically the most I would risk and that’s in good markets when I am making progress. In choppier markets I would decrease that to even 0.25%.

This is the benefit of using entry tactics that can keep your stop loss very logical and tight – you can have great position size so even a 10% move would move the needle in your portfolio.

A 10% move on 20% position increases your equity 2%.
A 10% move on a 50% position increases your equity curve by 5%

But you have to manage risk and build up to that sizing, proving to yourself that you can manage risk.

Trade Management

From these entries DOCS continued to trend higher through the day and closed near highs. You would have had a 10% cushion from the prior day low pivot and 7% from the range breakout. Certainly enough to warrant a hold.

With this amount of profit, more than 2X your initial risk on either discussed entry, you could have moved your stops to breakeven or even a bit in the money.

The next two days have been quite and tight, constructive after a strong bar like we had. Watching now for reconfirmation up and the start of a trend towards the gap up highs

Early next week you would be looking for a continuation higher, at that point you could take your first partial if you are a swing trader or simply adjust your stops higher a bit.

constructive action would be a break lower from these tight two days, this would yield a breakeven trade (or tiny profit)