Some of our biggest winning stock picks result from buying the “breakaway gap” chart pattern.
In this post, we walk through an actual +29% winning breakaway gap trade to show you how to easily find and profit from trading breakaway gaps.
A breakaway gap occurs when the opening price of a stock or ETF gaps above technical price resistance (gap up) or below support (gap down).
Breakaway gaps frequently occur early in the start of a trend and show conviction in the direction of the new trend.
The breakaway gap chart pattern can yield monstrous gains for momentum swing traders, but only with a clear understanding of the specific buy signals and the proper time to enter.
Continue reading to find out exactly how to recognize a breakaway gap and when to buy it–based on our +29% gain in Everquote ($EVER), a recent Wagner Daily stock pick.
How To Find A Breakaway Gap Pattern
A breakaway gap up can be an extremely bullish signal IF the gap emerges from a valid basing pattern that is confirmed by bullish price and volume action.
Below are five specific signals to help you identify valid breakaway gap trade setups.
5 Signals To Find The Best Breakaway Gap Ups
- A breakaway gap should be preceded by a valid basing pattern at least four to five weeks in length. The longer the consolidation, the more powerful the breakaway gap may be.
- Volume on the gap day should be at least three times (300%) greater than average (based on 50-day average volume). In many cases, especially with small and mid-cap stocks, volume may even surge to five to ten times greater than average.
- A breakaway gap up should open at least 4-5% above the prior day’s close–some of the best gaps are 5-10% higher or more. However, an opening gap of more than 30% is a bit too much and could lead to a few months of chop, rather than immediate upside follow-through. Swing traders don’t need to buy on the gap day, so we have the luxury of waiting to see price and volume action before entering.
- The opening price of the gap day should be above the high of the base of consolidation (resistance). However, an opening gap slightly below the high of the base may still be bought IF the move is confirmed by price and volume.
- The closing price of the gap day should be above the opening price, or at least near the open. We generally avoid breakaway gaps where the closing price is well below the open or the gap is filled.
How We Gained +29% From A Breakaway Gap Trade In Everquote ($EVER)
Breakaway Gap Identification
In the November 19 issue of our nightly stock picking report, we shared the following commentary and chart with subscribers:
“There is one new buy for Tuesday’s session in $EVER.
$EVER’s breakaway gap up on 10x average volume is a big-time buy signal. The current pullback looks to have found some support from the close of the initial gap-up day. We are setting a (buy) stop order just above Monday’s close.”
Let’s look at how this chart confirmed all five signals for a breakaway gap setup:
- $EVER formed a valid, six-week basing pattern (from Sept. 16 to Nov. 4) prior to the breakaway gap up.
- Always one of the most important signals, volume on the gap day was more than ten times (1000%) the average daily volume. It was also the largest volume spike since $EVER went IPO.
- Opening price on the gap day was approximately 20% higher than the prior day’s close.
- Opening price on the gap day was above the high of the base of consolidation.
- Closing price on the gap day was well above the opening price (in the top third of the intraday range).
Finding The Low-Risk Buy Entry For Swing Trading
We knew Everquote had explosive potential because the stock convincingly ticked the boxes of all five signals on the gap day.
However, we needed to patiently wait for a relatively low-risk entry point to develop.
Two weeks after the breakaway gap, notice the price of $EVER pulled back to near-term support of the rising 10-day moving average (on declining volume).
This produced a low-risk entry point on November 18, with a buy trigger above the November 15 high.
Alternatively, an equally solid buy entry could be made on November 19, either on the open or above the previous day’s high.
The official buy entry for this Wagner Daily swing trade triggered on November 19.
The price then followed through immediately after our entry, which is nearly always an extremely positive sign.
Trade Management For Maximum Profit
As shown above, $EVER zoomed steadily higher after entry, staying well above the 10-day moving average and our protective stop price.
We sold roughly one-third of our position into strength for a +29% gain on December 3.
With such a massive advance just nine days after our entry, it made sense to lock in the profit on at least a partial position.
Everquote peaked right after our first exit, then began pulling back from the highs.
A massive shakeout ensued on December 11, prompting us to alert subscribers that we would be selling another third of the position the next day (into strength of the bounce).
We ended up scoring a +16% gain with this second exit on December 12.
We currently remain long the final third of the position with a protective stop just below the low of the December 11 shakeout.
Looking back, our first sell point (Dec. 3) was a proactive judgment call to lock in some handsome gains after an explosive advance.
Our second exit point was not ideal, as we sold on a bounce after giving back a little more than we should have during the sharp pullback off the highs.
Despite seventeen years of honing our winning swing trading strategy, not all decisions we make as traders are the best ones.
To be a successful trader, you must check your ego at the door, then continually focus on learning and trying to improve every day.
Top Tips For Trading The Breakaway Gap
- Pay attention to where the stock closes on the gap-up day. Strong stocks that follow through to the upside often find support at the closing price of the original gap up. It is a bullish sign if they do, as was the case with $EVER.
- A breakaway gap up stock should find support at its first test of the 10-day moving average if momentum is strong. If the 10-day moving average does not hold, then we would look for the 20-day exponential moving average to provide support after a few weeks of chop.
- We generally try to limit breakaway gap trading to stocks that also have strong earnings and revenue growth. This increases the odds of institutional accumulation powering the stock price higher.
- Check out our previous blog post on breakaway gaps for additional tips and another real trade example.
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.
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