Trading Gap Downs on Earnings Day

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Every morning I scan through several news sources and rip through charts and screeners to find the best intra-day trading opportunities. The best setups are usually in stocks that have decent sized gaps (anything more than 5%), and have some fresh news (earnings/guidance, upgrade/downgrade, etc.) Today, although I had a few stocks on my watch-list, I decided to focus on Kroger.

Even though Kroger missed on earnings and issued downside guidance, my bigger picture plan in the stock was actually to find places to get long, if I saw a good risk/reward setup, and saw confirmation from the tape. There were three reasons behind my strategy this morning.

1) KR was gapping down about 12%. Although their numbers were bad, this seemed like any awfully large gap down for a grocery store chain.

2) KR was opening near major long term support in the 19.50/20 area, where the stock had bottomed out in March.

3) Although they are not in the exact same business, I clearly recall two major drug stores gapping down on poor guidance recently, only to find support and bounce intra-day. One was Walgreen’s (WAG) last week, which Bella highlighted in his blog, and the other was CVS in early November. I was going to look for any sign of similar price action in KR, and play for the bounce.

Well, after opening at 20, and doing a ton of volume there, KR went down to the 19.50 support area but never stayed below.  This is where Bella covered his short and left for an early lunch. I figured now that the hard money was made, it was time to look for the easier money.  As you can see from the chart below, KR held back above that 19.50 support area, and then broke out above 19.75, where we had previously identified major selling. This is how an intra-day bounce forms in an in-play stock. Sellers try to push the stock down below a major support area, and when it fails to break down, and starts to catch some bids, there is going to be an upmove. It also didn’t hurt that an analyst came out and defended the stock as it already started bouncing. Just a little fuel to the fire which might have given some shorts another reason to start running for cover. Once the stock started trading above 20 again in the late morning, some rather aggressive buyers stepped in and were able to push KR up another half point. When the volume dried out, and the uptrend broke, I was able to exit my core position with a decent gain after holding for about 75 cents. Not a huge bounce by any means, but definitely one of the best moves on a relatively quiet day in the market.

This is a pattern I’ve seen occur several times and I’m sure will be repeated again. Stocks like Kroger, ones involved in real brick and mortar businesses, will gap down big on poor guidance in an overall bullish market. When some of the longs get washed out of the market, and the sellers then fail to push the stock any lower, I’m looking to play for a bounce. I may have never traded KR before today, and I may never trade it again, but one this day it was one of the most in-play stocks, and for intra-day traders, it offered some excellent trading opportunities.

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