Breakaway Gap or Gap Fill: BB&T, General Electric, and Morgan Stanley

• Posted by Greg Harmon
• on January 24th, 2011

Below are the charts of three financial companies, BB&T (Ticker: BBT), General Electric (Ticker: GE), and Morgan Stanley (Ticker: MS):

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Aside from having financial businesses what do they all have in common? They all had a Gap up day Friday outside of their top Bollinger band,as shown below, and with strong volume .

When this happens there are two opportunities to prepare for: it can continue to run higher, a Breakaway Gap, or it can fail and retrace back to the level before the gap, a Gap Fill. How to prepare?

Break Away Gap

Often a gap up will continue the next day and start a new move higher. This will often be signaled by pre-market trading that is at the top end of or above the previous day’s range. It might also open the normal session in the top of that range or higher. If this happens there is a strong chance that the stock will continue higher. Watch for this confirmation to jump in long.

Gap Fill

When the price jumps out of the Bollinger Band, it raises the possibility that it will retrace lower to get back within the bands. Again there may be clues within the pre-market activity that the price will be lower. Additionally the price action at the beginning of the trading session will generally start moving lower very quickly, regardless of where it opens, if it will retrace. At that confirmation a short play can be entered with a stop at the high of the day and a target of the gap fill. But that is not the end. Often once the gap is filled price may then reverse again and continue the move higher.

A trader has to be nimble to capture these trades, ready to change quickly. Watch these stocks this morning and trade’m well.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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