S&P 500   3,782.50 (-0.22%)
DOW   30,282.75 (-0.11%)
QQQ   280.99 (-0.40%)
AAPL   145.80 (-0.21%)
MSFT   248.66 (-0.09%)
META   138.19 (-1.49%)
GOOGL   100.91 (-0.72%)
AMZN   120.26 (-0.69%)
TSLA   238.21 (-4.50%)
NVDA   130.73 (-0.71%)
NIO   15.87 (-5.14%)
BABA   84.22 (+0.13%)
AMD   67.36 (-0.80%)
T   15.94 (-0.93%)
MU   54.58 (+1.15%)
CGC   3.00 (-4.46%)
F   12.44 (+0.65%)
GE   67.55 (+0.01%)
DIS   99.96 (-1.46%)
AMC   7.26 (-7.28%)
PYPL   93.58 (+0.85%)
PFE   44.18 (-0.63%)
NFLX   234.77 (-2.48%)
S&P 500   3,782.50 (-0.22%)
DOW   30,282.75 (-0.11%)
QQQ   280.99 (-0.40%)
AAPL   145.80 (-0.21%)
MSFT   248.66 (-0.09%)
META   138.19 (-1.49%)
GOOGL   100.91 (-0.72%)
AMZN   120.26 (-0.69%)
TSLA   238.21 (-4.50%)
NVDA   130.73 (-0.71%)
NIO   15.87 (-5.14%)
BABA   84.22 (+0.13%)
AMD   67.36 (-0.80%)
T   15.94 (-0.93%)
MU   54.58 (+1.15%)
CGC   3.00 (-4.46%)
F   12.44 (+0.65%)
GE   67.55 (+0.01%)
DIS   99.96 (-1.46%)
AMC   7.26 (-7.28%)
PYPL   93.58 (+0.85%)
PFE   44.18 (-0.63%)
NFLX   234.77 (-2.48%)
S&P 500   3,782.50 (-0.22%)
DOW   30,282.75 (-0.11%)
QQQ   280.99 (-0.40%)
AAPL   145.80 (-0.21%)
MSFT   248.66 (-0.09%)
META   138.19 (-1.49%)
GOOGL   100.91 (-0.72%)
AMZN   120.26 (-0.69%)
TSLA   238.21 (-4.50%)
NVDA   130.73 (-0.71%)
NIO   15.87 (-5.14%)
BABA   84.22 (+0.13%)
AMD   67.36 (-0.80%)
T   15.94 (-0.93%)
MU   54.58 (+1.15%)
CGC   3.00 (-4.46%)
F   12.44 (+0.65%)
GE   67.55 (+0.01%)
DIS   99.96 (-1.46%)
AMC   7.26 (-7.28%)
PYPL   93.58 (+0.85%)
PFE   44.18 (-0.63%)
NFLX   234.77 (-2.48%)
S&P 500   3,782.50 (-0.22%)
DOW   30,282.75 (-0.11%)
QQQ   280.99 (-0.40%)
AAPL   145.80 (-0.21%)
MSFT   248.66 (-0.09%)
META   138.19 (-1.49%)
GOOGL   100.91 (-0.72%)
AMZN   120.26 (-0.69%)
TSLA   238.21 (-4.50%)
NVDA   130.73 (-0.71%)
NIO   15.87 (-5.14%)
BABA   84.22 (+0.13%)
AMD   67.36 (-0.80%)
T   15.94 (-0.93%)
MU   54.58 (+1.15%)
CGC   3.00 (-4.46%)
F   12.44 (+0.65%)
GE   67.55 (+0.01%)
DIS   99.96 (-1.46%)
AMC   7.26 (-7.28%)
PYPL   93.58 (+0.85%)
PFE   44.18 (-0.63%)
NFLX   234.77 (-2.48%)

Gap Down Stocks

A gap is a break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Stocks that "gap down" are companies that open at prices that are significantly lower than their previous closing prices, often due to after-hours news items that negatively affect investor perceptions of the company's value. More about gap down stocks.

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CompanyGap Down %Opening PricePrevious CloseCurrent PricePrice Change Since OpenDaily VolumeIndicator(s)
Troika Media Group, Inc. stock logo
Troika Media Group
-14.6%$0.30$0.35$0.31+2.3%6,776Positive News
Gap Down
AeroClean Technologies, Inc. stock logo
AeroClean Technologies
-14.1%$5.10$5.94$4.68-8.2%134,771Analyst Report
News Coverage
Gap Down
Helen of Troy Limited stock logo
Helen of Troy
-11.9%$90.33$102.58$108.41+20.0%37,712News Coverage
Gap Down
U.S. Well Services, Inc. stock logo
U.S. Well Services
-11.0%$5.25$5.90$6.22+18.5%5,577News Coverage
Positive News
Gap Down
SRAX, Inc. stock logo
-10.5%$1.71$1.91$1.72+0.6%598Gap Down
Eiger BioPharmaceuticals, Inc. stock logo
Eiger BioPharmaceuticals
-9.1%$6.72$7.39$6.96+3.6%20,146News Coverage
Gap Down
Sotera Health stock logo
Sotera Health
-9.0%$7.32$8.04$7.07-3.4%75,352Analyst Downgrade
News Coverage
Gap Down
FingerMotion, Inc. stock logo
-8.7%$6.26$6.86$8.17+30.5%349,871News Coverage
Gap Down
Trading Halted
Applied DNA Sciences, Inc. stock logo
Applied DNA Sciences
-8.6%$1.39$1.52$1.47+5.8%18,122Gap Down
Amylyx Pharmaceuticals, Inc. stock logo
Amylyx Pharmaceuticals
-8.2%$28.61$31.16$29.51+3.1%47,366Analyst Report
Gap Down
REE Automotive Ltd. stock logo
REE Automotive
-8.0%$0.69$0.75$0.73+5.2%33,665Positive News
Gap Down
Rubicon Technologies, Inc. stock logo
Rubicon Technologies
-7.9%$1.75$1.90$1.77+1.1%5,998News Coverage
Gap Down
InspireMD, Inc. stock logo
-7.6%$1.33$1.44$1.39+4.5%789Analyst Report
Gap Down
Senti Biosciences, Inc. stock logo
Senti Biosciences
-7.6%$4.75$5.14$4.25-10.5%89,192Gap Down
The Oncology Institute, Inc. stock logo
Oncology Institute
-7.6%$4.51$4.88$4.72+4.7%2,990Gap Down
PLx Pharma Inc. stock logo
PLx Pharma
-7.6%$0.58$0.62$0.58+1.2%3,168Positive News
Gap Down
SMART Global Holdings, Inc. stock logo
SMART Global
-7.5%$15.73$17.01$15.95+1.4%38,960Earnings Report
Analyst Report
News Coverage
Gap Down
Finch Therapeutics Group, Inc. stock logo
Finch Therapeutics Group
-7.5%$1.73$1.87$1.88+8.4%297Positive News
Gap Down
Pharming Group stock logo
Pharming Group
-7.1%$10.83$11.66$10.56-2.5%438Positive News
HilleVax, Inc. stock logo
-6.8%$17.68$18.98$18.14+2.6%2,386Gap Down
Alzamend Neuro, Inc. stock logo
Alzamend Neuro
-6.5%$1.29$1.38$1.40+8.5%10,038Positive News
Gap Down
Passage Bio, Inc. stock logo
Passage Bio
-6.5%$1.29$1.38$1.33+2.7%2,758Positive News
Gap Down
Alset EHome International Inc. stock logo
Alset EHome International
-6.3%$0.22$0.24$0.22-1.3%25,204Insider Buying
News Coverage
Positive News
Gap Down
Aura Biosciences, Inc. stock logo
Aura Biosciences
-6.3%$13.24$14.13$14.42+8.9%1,269Gap Down
Avenue Therapeutics, Inc. stock logo
Avenue Therapeutics
-6.2%$13.60$14.50$8.61-36.7%39,576Positive News
Gap Down
-6.1%$4.80$5.11$4.78-0.4%15,990Analyst Downgrade
Gap Down
Uxin Limited stock logo
-6.1%$0.62$0.66$0.67+8.1%4,060Gap Down
-6.1%$1.24$1.32$1.28+3.2%7,416Positive News
Gap Down
Squarespace, Inc. stock logo
-6.0%$21.85$23.25$21.13-3.3%26,756Gap Down
TORM plc stock logo
-6.0%$18.61$19.80$19.29+3.7%2,948Gap Down
Gambling.com Group Limited stock logo
Gambling.com Group
-6.0%$7.40$7.87$7.37-0.4%16Short Interest ↓
Positive News
Gap Down
Lion Group Holding Ltd. stock logo
Lion Group
-5.9%$0.95$1.01$0.97+2.2%14,335News Coverage
Gap Down
Magenta Therapeutics, Inc. stock logo
Magenta Therapeutics
-5.9%$1.27$1.35$1.30+2.4%836Short Interest ↑
News Coverage
Gap Down
Gatos Silver, Inc. stock logo
Gatos Silver
-5.9%$3.02$3.21$3.12+3.3%7,757News Coverage
Gap Down
Tupperware Brands Co. stock logo
Tupperware Brands
-5.8%$6.80$7.22$6.92+1.8%30,003Analyst Report
News Coverage
Gap Down
Repay Holdings Co. stock logo
-5.8%$7.29$7.74$7.38+1.2%32,788Gap Down
a.k.a. Brands Holding Corp. stock logo
a.k.a. Brands
-5.8%$1.47$1.56$1.55+5.4%2,113Gap Down
Hut 8 Mining Corp. stock logo
Hut 8 Mining
-5.8%$1.96$2.08$2.05+4.3%349,459Short Interest ↑
News Coverage
Gap Down
IronNet, Inc. stock logo
-5.8%$0.68$0.72$0.64-6.0%15,086Gap Down
KORE Group Holdings, Inc. stock logo
KORE Group
-5.8%$2.13$2.26$2.19+2.8%1,808Gap Down
Graphite Bio, Inc. stock logo
Graphite Bio
-5.7%$3.28$3.48$3.36+2.4%707Short Interest ↓
Positive News
Gap Down
BGC Partners, Inc. stock logo
BGC Partners
-5.7%$3.61$3.83$3.85+6.6%53,923Gap Down
Rapid Micro Biosystems, Inc. stock logo
Rapid Micro Biosystems
-5.7%$3.30$3.50$3.17-3.9%1,130News Coverage
Positive News
Gap Down
Visionary Education Technology Holdings Group Inc. stock logo
Visionary Education Technology Holdings Group
-5.7%$0.83$0.88$0.83+0.0%100Positive News
Gap Down
Pardes Biosciences, Inc. stock logo
Pardes Biosciences
-5.6%$1.68$1.78$1.70+1.2%2,301Positive News
Gap Down
VivoPower International PLC stock logo
VivoPower International
-5.6%$0.73$0.77$0.76+4.2%2Positive News
Gap Down
Sientra, Inc. stock logo
-5.6%$0.77$0.81$0.81+6.4%5,200Gap Down
Stratasys Ltd. stock logo
-5.6%$14.11$14.94$14.86+5.3%4,683Gap Down
Cross Country Healthcare, Inc. stock logo
Cross Country Healthcare
-5.5%$31.74$33.59$31.91+0.5%35,810Analyst Downgrade
Insider Selling
News Coverage
Gap Down
Prelude Therapeutics Incorporated stock logo
Prelude Therapeutics
-5.5%$6.74$7.13$7.08+5.0%316Positive News
Gap Down
Membership Collective Group Inc. stock logo
Membership Collective Group
-5.4%$4.01$4.24$4.02+0.2%25,462Analyst Downgrade
News Coverage
Negative News
Gap Down
Novo Integrated Sciences, Inc. stock logo
Novo Integrated Sciences
-5.4%$1.06$1.12$1.13+6.6%401Positive News
Gap Down
ZeroFox Holdings, Inc. stock logo
-5.3%$5.70$6.02$5.69-0.2%435Gap Down
Athersys, Inc. stock logo
-5.3%$1.79$1.89$1.69-5.6%21,793Gap Down
Fathom Holdings Inc. stock logo
-5.3%$5.05$5.33$5.14+1.8%587Gap Down
Axcella Health Inc. stock logo
Axcella Health
-5.2%$1.82$1.92$1.87+2.7%655Analyst Report
Short Interest ↑
Gap Down
Calithera Biosciences, Inc. stock logo
Calithera Biosciences
-5.2%$2.92$3.08$2.96+1.4%190Gap Down
Starry Group Holdings, Inc. stock logo
Starry Group
-5.2%$1.28$1.35$1.30+1.6%1,980Gap Down
IAMGOLD Co. stock logo
-5.2%$1.20$1.26$1.16-3.3%229,523Short Interest ↑
Gap Down
Dakota Gold Corp. stock logo
Dakota Gold
-5.2%$3.31$3.49$3.21-3.0%1,032Gap Down
Sesen Bio, Inc. stock logo
Sesen Bio
-5.1%$0.47$0.50$0.49+3.5%17,665Gap Down
PAVmed Inc. stock logo
-5.1%$0.93$0.98$0.96+3.4%2,404Positive News
Gap Down
Singularity Future Technology Ltd. stock logo
Singularity Future Technology
-5.0%$2.65$2.79$2.88+8.7%10,402Positive News
Gap Down
Industrial Logistics Properties Trust stock logo
Industrial Logistics Properties Trust
-5.0%$5.32$5.60$5.10-4.1%28,028Analyst Revision
Positive News
Gap Down
Oportun Financial Co. stock logo
Oportun Financial
-5.0%$4.78$5.03$4.81+0.6%3,392Positive News
Gap Down
Renalytix Plc stock logo
-4.9%$1.32$1.39$1.30-1.5%10,400Gap Down
Millicom International Cellular S.A. stock logo
Millicom International Cellular
-4.9%$11.82$12.43$11.94+1.0%3,376Gap Down
Trinseo PLC stock logo
-4.9%$18.91$19.88$19.28+2.0%8,265Analyst Report
Analyst Revision
Gap Down
Liminal BioSciences Inc. stock logo
Liminal BioSciences
-4.8%$0.40$0.42$0.40flat177Positive News
Gap Up
United Insurance Holdings Corp. stock logo
United Insurance
-4.8%$0.67$0.70$0.64-4.2%4,589Positive News
Gap Down
NeuBase Therapeutics, Inc. stock logo
NeuBase Therapeutics
-4.8%$0.38$0.40$0.37-2.9%65Positive News
Gap Down
Sonder Holdings Inc. stock logo
-4.8%$1.80$1.89$1.88+4.2%17,992Gap Down
The Valens Company Inc. stock logo
-4.7%$0.68$0.71$0.72+5.1%2,261Upcoming Earnings
Gap Down
Innovid Corp. stock logo
CapStar Financial Holdings, Inc. stock logo
CapStar Financial
-4.7%$18.38$19.29$19.03+3.5%1,363Short Interest ↑
News Coverage
Positive News
Gap Down
Sprott Inc. stock logo
-4.7%$34.97$36.70$35.15+0.5%501News Coverage
Gap Down
Dana Incorporated stock logo
-4.7%$12.37$12.98$12.90+4.3%38,901Short Interest ↑
Credit Suisse Group AG stock logo
Credit Suisse Group
-4.7%$4.29$4.50$4.23-1.4%1.57 millionNews Coverage
Gap Down
Enochian Biosciences, Inc. stock logo
Enochian Biosciences
-4.7%$1.84$1.93$1.80-2.2%236Short Interest ↓
Positive News
Gap Down
Icosavax, Inc. stock logo
-4.7%$3.07$3.22$3.12+1.6%1,484News Coverage
Positive News
Gap Down
PolyPid Ltd. stock logo
-4.7%$1.23$1.29$1.22-0.8%252Gap Down
Lizhi Inc. stock logo
-4.6%$0.62$0.65$0.63+1.6%1,079Gap Down
Immuneering Co. stock logo
-4.6%$14.31$15.00$14.03-2.0%860News Coverage
Positive News
Gap Down
Endeavour Silver Corp. stock logo
Endeavour Silver
-4.5%$3.38$3.54$3.48+3.0%150,212Gap Down
SoundHound AI, Inc. stock logo
SoundHound AI
-4.5%$3.60$3.77$3.61+0.3%5,482Positive News
Gap Down
CymaBay Therapeutics, Inc. stock logo
CymaBay Therapeutics
-4.5%$3.39$3.55$3.43+1.2%24,987News Coverage
Positive News
Gap Down
Avino Silver & Gold Mines Ltd. stock logo
Avino Silver & Gold Mines
-4.5%$0.57$0.59$0.58+1.4%2,100Analyst Report
News Coverage
Gap Down
Century Aluminum stock logo
Century Aluminum
-4.5%$6.36$6.66$6.45+1.4%82,228Gap Down
Domo, Inc. stock logo
-4.5%$18.13$18.98$19.57+7.9%4,315Gap Down
VOXX International Co. stock logo
VOXX International
-4.5%$7.70$8.06$7.95+3.2%690Upcoming Earnings
Gap Down
Zymergen Inc. stock logo
-4.5%$3.00$3.14$2.93-2.3%36,106News Coverage
Gap Down
Latch, Inc. stock logo
-4.5%$0.95$0.99$0.94-0.6%6,696Gap Down
Global-e Online Ltd. stock logo
Global-e Online
-4.4%$28.14$29.45$28.69+2.0%75,118Gap Down
Fresenius Medical Care AG & Co. KGaA stock logo
Fresenius Medical Care AG & Co. KGaA
-4.4%$14.19$14.85$14.15-0.3%45,441Analyst Report
Positive News
Gap Down
PepGen Inc. stock logo
-4.4%$9.92$10.38$10.55+6.4%7,845Gap Down
Olin Co. stock logo
-4.4%$45.51$47.62$47.63+4.7%23,767Analyst Report
Gap Down
Color Star Technology Co., Ltd. stock logo
Color Star Technology
-4.4%$1.51$1.58$1.80+19.2%39,670Stock Split
Positive News
Gap Down
Qurate Retail, Inc. stock logo
Qurate Retail
-4.4%$2.17$2.27$2.13-1.8%185,205Gap Down
GitLab Inc. stock logo
-4.4%$52.08$54.46$53.40+2.5%22,918Short Interest ↑
Gap Down
Muscle Maker, Inc. stock logo
Muscle Maker
-4.4%$0.38$0.40$0.40+5.5%314Positive News
Gap Down
How Investors Can Identify and Successfully Trade Gap-Down Stocks

Trading gap-down stocks can be a profitable strategy for active, risk-tolerant investors

Gap-down stocks are stocks that open at a lower level than the previous day’s closing price. A signature feature of a gap-down stock is a sharp downward price move with no other trading occurring before or after. This movement creates a price gap. Investors can identify gap-down stocks during after-hours and pre-market trading. Reasons why a stock may gap down include the release of news about the stock, such as an earnings report that missed analysts’ expectations or some sort of geo-political event that may incite speculators to bid down the price of the stock.

A gap-down stock indicates a trend that may either be short-lived (i.e. the gap fills quickly) or could be the beginning of a negative reversal for the stock. Trading the gap requires discipline and an understanding of how to analyze the gap. An effective trading strategy will also require the use of trailing stops that will help the trader exit the trade before key levels of support or resistance are breached (which usually indicates the trend is breaking).

In this article we’ll dissect gap-down stocks by defining what they are and how traders identify them. After that, we’ll review the different kinds of gaps and how to identify them. We’ll also review some of the more common trading strategies for gap-down stocks.

Why Are Gap-Down Stocks Important?

Anytime an investor identifies a stock that is gapping down, it indicates a large volume of sellers. However, what’s harder to tell is whether the gapping action is short lived or whether it will continue to become a trend.

Investors who want to trade gap-down stocks can easily find them by using a stock screener. Once investors identify a potential gap-up stock to trade, they should carefully study the longer term charts of the stock to check for clearly defined areas of support and resistance.

 It is important to look at stocks that are trading with a high volume (a good average volume is above 500,000 shares a day). A gap-down stock is clearly represented in a candlestick pattern. A candlestick is a technical indicator that shows the opening and closing price of a stock for a specific period. The color and composition of the candlestick provide information about a stock’s direction and momentum.

One word of caution should come into play here. Although any stock can gap down, significant price movement can be common with penny stocks or other obscure stocks. In this case, the stock may show a significantly large gap. However, the trading volume for these stocks is typically fairly low. This not only explains the gap, but also is a good indication that it may be difficult to trade. 

How Can Investors Interpret the Significance of a Stock that is Gapping Down?

The gap in a gap-down stock is either a “full gap” or “partial gap”.

  • A full gap occurs when a stock opens at a lower level than the previous session’s low.
  • A partial gap occurs when a stock opens below the previous day’s closing price.

Here’s an example that illustrates the difference between a full gap and a partial gap. During the trading day the stock of Company XYZ closes at $35. However, during the day the stock was trading as low as $32 per share. When the market opens on the following trading day, the stock was at $31. This indicates a full gap because the price was below the previous daily low. However, if the stock opens between $32 and $35 it would be a partial gap because the stock price would be below the previous close but above the previous day’s low.

For many investors, full gaps offer a better trading opportunity because they provide a bigger window for profit (sometimes the gap can be in place for several days). This is, in part, due to what a full gap suggests about supply and demand. If a gap-down stock opens below the previous daily low it means the stock is under tremendous selling pressure. This increase selling demand signals the market maker that the stock requires a significant price change to fill market orders. With a partial gap, the demand does not typically require a large change in price.

Beyond the terms full gap and partial gap, gaps generally fall into one of four categories:

  • Breakaway Gap – This is a gap that takes place at the end of a pricing pattern and signals the start of a new trend. A breakaway gap coincides with high volume.
  • Exhaustion Gap – This is a gap that takes place near the end of a pricing pattern and represents a final attempt to set a new high or low. An exhaustion gaps coincides with low volume.
  • Common Gap – A common gap is one that cannot be placed in a price pattern. It simply represents an area where the price has gapped.
  • Continuation Gap – This is a gap that occurs in the middle of a price pattern and signals a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.

It is common for gaps to get filled in naturally. This means the stock price will move back to its original level. Because of the volatility around earnings season, this is typically a time when stocks will make large price movements.

One reason for this is that it’s not uncommon for analysts to be overly pessimistic and push a stock down too much. In this case, there will almost always be a correction as the market absorbs the news and investors push the stock higher. If the movement is done without firm support and resistance levels, the stock may revert back because there is nothing to keep it anchored at that level.

Also, exhaustion gaps are more likely to be filled since they happen at the end of a pricing pattern. In the case of a gap-down stock, the end of a pricing pattern is a signal for buyers to start entering the stock, making it more likely to start an uptrend.

What are Some Effective Trading Strategies for Gap-Down Stocks?

Once you are familiar with the mechanics of gaps and understanding how to look for potential gap trading opportunities, it’s time to look at some common gap trading strategies. These involve having clear rules for entering and exiting a trade. Gap trading can be risky and having the discipline to follow entry and exit points is one way for you to help minimize that risk.

Most gap trading occurs one hour after the market opens to allow time for the stock price to settle into a range. No matter what strategy is being used, it is important to set trailing stops that provide a point where you exit the trade in case the trade starts moving in the opposite direction. For example, if you buy a stock at $50, you could set a trailing stop of 5 percent, in this case $47.50. If the stock rises to $60, you raise the stop to $55.50 (5% of $60) and keep on raising it while the price rises. The opposite would occur if you’re trying to short the same stock at $50. In this case, you would set a trailing stop at $53.50. If the price drops to $40, you would reset the stop at $42. Trailing stops will usually be tighter (smaller) for partial gap stocks as opposed to full gap stocks.

Here are the most common trading strategies for gap-down stocks. These will occur one hour after the market open (typically 10:30 A.M. EST). These strategies also work for after-hours or pre-market trading.

  • Full Gap Long Position (Buy): Set a long trailing stop at two ticks (defined by the bid/ask spread) above whatever the previous day’s low stock price. The bid/ask spread is usually either one-eight or one-quarter point.
  • Full Gap Short Position (Sell): Set a short trailing stop at two ticks below the lowest stock price reached in the first hour of trading.
  • Partial Gap Long Position (Buy): Set a long stop two ticks above the high achieved in the first hour of trading.
  • Partial Gap Short Position (Sell): Set a short stop two ticks below the low achieved in the first hour of trading.

What Is a Dead Cat Bounce and How Can Investors Successfully Trade It?

A dead cat bounce is a short trading strategy unique to gap-down stocks. A dead cat bounce is a significant psychological market event that is triggered by a significant market event that causes a wave of selling. Even though the stock may move up a little bit, it is really just an opportunity for sellers to get out.

The general idea behind a dead cat bounce is a stock that gaps down in overnight trading, continues to go down at the opening bell but then rallies to a point near the opening price before continuing its downward trend.

For a dead cat bounce to exist a few conditions need to be met.

  1. The stock must show a significant gap from the prior day’s closing price. If the stock is not considered to be volatile, many traders use 5% as a guideline. For volatile stocks, they usually look for a much larger gap.
  2. The stock must decline for at least five minutes once trading begins. If the price doesn’t keep falling, there can’t be a bounce.
  3. The stock will then start to rally in an area close to its opening price. This will typically represent a resistance level. This is where traders should be looking to take a short position.
  4. The stock will then fall again. This is the confirmation that the stock is indeed having a dead cat bounce.

The Bottom Line on Gap-Down Stocks

On any given day on any of the major stock exchanges, it’s not uncommon for stocks to display volatile price moves within the course of a trading day. However high-frequency traders, particularly day traders understand – and attempt to profit from – the activity that happens after the market closes.

Gap-down stocks are stocks that show significant downward price movement in after hours or pre-market trading. Although stocks can gap down at any time, they are common during earnings season when a report that falls short of analysts’ expectations can trigger a wave of selling. Stock screening tools make it easy for investors to find gap-down stocks, but identifying which ones make good trading opportunities requires a bit more sophistication.

Gap prices can either reflect a full gap or a partial gap. And fit in one of four categories: A breakaway gap, an exhaustion gap, a common gap or a continuation gap. Knowing what type of gap is the key to successful trading.

Gap trading strategies require a disciplined system that includes the use of trailing stops at well-defined entry and exit points to limit loss and protect profits. Not every gap stop is ideal for trading. Investors need to pay attention to other technical indicators such as trading volume to decide whether or not a gap-down stock may produce a profitable trade.

Effective gap trading strategies are executed in the first hour after the opening bell. This is because the first hour will typically allow investors to see if the trend is sustainable and also to track areas of support and resistance that are critical when setting trailing stops. Trading gap-down stocks in many cases requires taking a short position, which can leave an investor more exposed to risk.

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