Beware of the Penny stock Gap Up
See the graph of a typical Gap Up you want to avoid at the right… the stock gapped up from around .23 to .30 then moved to .33 in the next 15 minutes, then dropped like a rock to
about .25 before it recovered a little bit. At this point, it’s anyone’s guess as to what the stock will do the rest of the day, but you can be pretty sure that the stock has seen its high for the day.
Often there is big news or a coordinated newsletter push after penny stock closing hours causing buyers to start putting orders in early for the stock the next day. This will cause the stock to gap up in price from the previous day’s close. These gaps are a very good thing if you are already in the stock as they give you a great opportunity to get out with a nice profit. But if you are thinking of jumping in because of the excitement of the gap up it can be very risky.
Many times there is a frenzy of buyers trying to get a position in a stock on the gap up that they are moving the stock to unrealistic levels. The more buy orders, the higher the penny stock gaps up. After the opening bell is where things can get dicey. Many times, at the open, or within 30 minutes of the open, the stock hits its high for the day. Then if a few sales start coming in a selling frenzy can easily start. Those that bought on the gap up scramble to get out while at the same time, long term holders see the stock coming down from its high and decide to take their profit off the table. The price can drop so fast you can have a hard time getting out quickly and can take quite a loss.
If you are determined to get in, I recommend on gap ups that you contain your excitement and watch the stock for at least 30 minutes . If after 30 minutes the stock is still steadily moving up and you are seeing mostly buys, you might want to jump in, but as soon as you see “mostly buys” turn to “mostly sells” get out. Hopefully this will be after the stock has moved up 5 or 10%. DO NOT wait for the selling panic to start, get out early and take your profit. If you’re in the stock and the price seems to have stalled, you should also get out even if it means taking a small loss. Often, the stall in price will start the selling panic because everyone starts thinking that the stock has hit it’s high and it’s time to get out.
If you wait as I recommend, and the penny stock starts to move down after the morning gap up, just stay away and be happy about all the money you did not lose.
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