There is a wisdom in the stock market – follow the bullish momentum. Rather than chasing elusive bottoms, ride the coattails of soaring stocks. Here are two golden nuggets of advice from market legends:
“In the stock market, what looks too high usually goes higher and what looks too low usually goes lower.” ~ William J O’Neil
“The trend is your friend until the end when it bends.” ~ Ed Seykota
Over the years, I’ve found the breakaway gap setup to be a cornerstone of my trading success. Today, I’ll delve into the five key traits of breakaway gaps, using the real-time example of CEG. Later, we’ll explore how to navigate these trades effectively.
1. Game-Changing Bullish Catalyst
Breakaway gaps hinge on a fresh bullish trigger. These catalysts spark significant overnight price shifts in stocks. Case in point: the recent nuclear pact inked between Microsoft (MSFT) and Constellation Energy (CEG). In a groundbreaking deal, CEG will reinvigorate Three Mile Island’s nuclear facility to power MSFT for two decades. Given the surging demand for energy-hungry data centers fueling AI innovations, energy stands as the next wave of the AI realm.
2. Prior Uptrend & Base Breakout
For prime breakaway gaps, I scout out preceding uptrends, a foundational structure, and a gap bursting out of that base. CEG is currently shattering a base established since May.
3. Explosion in Volume
Breakaway gaps allow retail investors to trail institutional behemoths driving the market. A surge in volume signals voracious institutional appetite for shares. Since large funds can take years to amass stocks, capitalizing on gaps can prove lucrative. Ideally, a 100% or more spike in volume from the 50-day norm is optimal. Following the MSFT news, CEG’s volume soared over 300% – a bullish omen.
4. Strong Closing Range
A robust closing range signifies steadfast buyers with no rush to offload shares. Look for stocks wrapping up in the top 25% of the daily range on gap days. CEG peaked at $255.24 on the gap day and sealed the session at $254.98.
Image Source: TradingView
5. Top Industry Group
A flourishing industry underpins the breakaway gap as a trend, not an anomaly. In CEG’s environment, peers in the uranium and utility sphere are on the rise, including Vistra (VST), Cameco (CCJ), and NRG (NRG).
Effective Position Management
Buying a Breakaway Gap
Various methods exist to enter a breakaway gap position. Typically, I secure half on the gap day’s open to ride the initial surge, then add towards the day’s end for confirmation of a robust close. Incremental buying offers flexibility.
Breakaway Gap Risk Management
As with any setup, risks abound in breakaway gaps. I opt to exit if a stock closes below the gap-day low. This signals a need for consolidation and hints at weaker momentum than anticipated.
Finale
Breakaway gaps often birth stellar market winners. CEG epitomizes these defining characteristics.
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NRG Energy, Inc. (NRG) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Constellation Energy Corporation (CEG) : Free Stock Analysis Report
Cameco Corporation (CCJ) : Free Stock Analysis Report
Vistra Corp. (VST) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
