A breakaway gap occurs when the opening price of a stock “gaps” well above technical price resistance (gap up) or below support (gap down).
When the overall market is in a “buy” signal, these gaps can lead to explosive moves over several months.
Breakaway gaps often lead a stock’s price to double in just 8 to 12 weeks (depending on a stock’s volatility)–but only with a clear understanding of the specific buy signals and proper time to enter.
Continue reading to discover exactly when to buy a breakaway gap, and the ideal entry points for the most positive risk-reward ratio.
A breakaway gap is one of our favorite patterns because it often occurs early in the start of a trend, and shows conviction in the direction of the new trend.
A breakaway gap up can be an extremely bullish signal IF the gap emerges from a valid basing pattern that is confirmed by bullish price and volume action.
Below are five specific signals to help you properly identify a breakaway gap trade setup.
Buying a proper breakaway gap at the right time can lead to massive gains–but not all breakaway gaps are buyable.
For a breakaway gap to be bought, it must first meet two criteria:
Once we have established that a gap up is buyable, there are three potential buy points to monitor.
This is a legit buy entry for traders who are able to participate in the market during trading hours.
With the Morpheus Trading strategy, we typically buy a half position on the opening strength, by waiting for a move above the 1 or 5-minute opening high.
Alternatively, we buy the opening gap up on weakness if the stock shows signs of strength after 15 to 30 minutes of opening weakness.
While buying the opening gap can be ideal, don’t feel left out if you are not able to trade during market hours.
Next, we will walk through two alternate buy points for part-time traders who trade stocks as a side hustle–just like most of our members.
2. Rally above the high of the gap-up day (when volume confirms)
If you are unable to buy the day of the gap-up, a move above the high of the gap-up day becomes a secondary buy point–but only if the breakaway gap was confirmed by higher volume.
Volume on the day of the breakaway gap should be 100 to 200% above its 50-day average volume level.
For newer stocks, the volume surge can be much higher.
For well-known, highly liquid stocks (like $NVDA), we are fine with buying a breakaway gap even if the volume increase is slightly below 100%.
When volume confirms, the high of the gap-up day becomes the secondary buy point.
3. Pullback to the high of the gap-up day
If you miss the first two entries above, the third potential entry point is a pullback to the high of the gap-up day.
This third method is how we recently entered $NVDA in The Wagner Daily report:
$NVDA broke out from is base on volume that was 85% above average.
Ideally, we like to see a 100-200% volume spike, but 85% above average is fine for an established, liquid stock like Nvidia.
Note that the price chopped around for two days following the gap up day, with the second day of chop forming a tight-ranged inside day on lighter volume (bullish action).
On October 29, $NVDA cleared the gap-up day high on a pick-up in volume, which was a clear buy signal (#2 method).
We missed the $NVDA buy entry that day, but immediately alerted members of our nightly stock trading report of a potential pullback entry at $253.
Our buy limit order triggered the following day, as $NVDA found support and reversed higher.
Nvidia did not look back after our entry, as the stock gained +24% in just four days before stalling just above $300.
We are still holding $NVDA with an unrealized gain of +17%, and will continue to trail a stop higher to maximize profits as the trend continues higher.
As always, we will alert Wagner Daily subscribers of further changes to the exit strategy in the portfolio section of the nightly report.
Breakaway gap ups should always be monitored by swing and position traders for low-risk entry points because they can be quite explosive.
Use the five signals above as a checklist to confirm the validity of a breakaway gap chart pattern, then patiently wait for a low-risk entry point on a pullback to near-term support.
Always use protective stops and trail them higher to minimize risk and maximize profit as the trade moves in your favor.
Subscribe now to The Wagner Daily newsletter to be alerted to the next hot breakaway gap trade setup on our radar.
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