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In this issue, we'll be looking at two companies. Both are examples of my GapDownProfits Strategy.

You can follow along visually on your own charting software, or you can go to the Public Charts I've posted here: Public Charts
The two charts are listed as DRYS and GNK and both trades happened on December 23, 2008. So, if you're using the Public Charts link, then go to pages 6 and 7 for these charts.

The first thing to note is that both companies are in a similar industry. They are in the shipping and transportation sector. I'm sure you remember the news around this time. It seemed that every day brought more dismal news regarding the world economy, consumer spending, and consumer sentiment. If people are not buying, then the shipping business suffers because there is less to ship. Both stocks enjoyed a slight lift at the end of the day on the 22nd, but both gapped down on the morning of the 23rd, giving back the gains from the previous day.

There are several things I look at with gap down stocks. (By the way, look at my recently posted "About Bob..." page to learn about free Twitter stock updates.) I want to see gaps in which the morning's opening price is at least 3% below the previous day's close.

Let's look at each stock in turn.

DRYS closed on the 22nd at about $10 and then lost 10% of its value in the first few minutes of trading on the 23rd. This presents a great opportunity if the stock charts show signs of a recovery and the market supports that move. I call it "the congruence of opinion" and I'm looking for all of the indicators to tell me the same story. When they agree, then I buy.

The first thing you'll see is how both RSI and Stochastics bounced off of the 30% line in the first 10-minute candle. It also bounced right at the bottom of the Bolllinger Band. At 9:40, the 2 SMA crossed up and through the 4 SMA at a sharp angle. This happened at a price point of $9.50, though the indicators show you could have entered the trade before this point.

After this initial recovery, we begin looking at the strength of the indicators to see if they will maintain a rally or suddenly retreat. An initial recovery means nothing about future profits. So, the first test for this occurs at the meridian. This is my name for the middle line of the Bollinger Bands. As we'll see later, this meridian is often a testing ground for price and strength. But, in this case, RSI and Stochastics are strong enough to continue on and cross the meridian to the other side of the chart. This is huge and we are now watching our profits climb quickly.

But, starting around 10:20, you see the RSI and Stochastics start to flatten out at the top. As they fall below 70%, so does the price, and we have the 2 SMA crossing down and through the 4 SMA at $9.95. This also happens to be at the top of the 10-minute MACD curve and at the upper end of the Bollinger Band. These are all signs telling you to take your profit and go home. Don't be greedy. Take the profit and exit the trade.

On this trade, even if you had simply followed the 2 and 4 SMA (Simple Moving Averages), you would have pocketed almost 5% in less than an hour of trading. Not bad at all.

But then what happened? Gap down recovery stocks also make for good short plays after they've reached their peak. So, you could have shorted the stock at the same point you sold it and then riden it down for another sweet gain. Notice how the price found support at the meridian this time - almost on cue.

Our second stock is GNK. So go ahead and go to page 7 of the Public Charts to view this one.

GNK, another shipping company, gapped down on the same morning, though not as violently as our previous trade. It went down about 4% in the first few minutes of trading and soared and fell dramatically in the fist few minutes. By the way, it's difficult to catch these 1-minute trades and I don't advise trying to do so - carries too much risk.

At 9:50, a long bullish candle travels all the way from the bottom of the Bollinger Bands to the meridian, gaining 3% in just 10 minutes. Along the way, the 2 SMA crosses up and through the 4 SMA at $12.60. The MACD forms a nice confirmed bottom and the fast part of the MACD "diverges" from the slow line.

At 10:35, RSI and Stochastic start to flatten out, just as they did with our other trade. The MACD has a confirmed top (starts to flatten out) and then price begins its retreat from the top Bollinger Band. The 2 SMA crosses down and through the 4 SMA at $13.20, producing almost 5% for us.

But this stock shows the wisdom of shorting a gap up recovery as well. Shorting at $13.20, the charts give no reason for covering that short until $12.40 and the short produces a bigger gain than the long play did. At $12.40, you can see how RSI and Stochastics are wallowing below 30%. But then the MACD forms a bottom and we have the 2 and 4 crossing back up again.

So, two stocks, four plays, with each play averaging around 5%. Nothing wrong with a 10% gain in one day. As I say this, however, I don't want you to think that these sorts of gains happen every time. You can get spoiled with trades like this, making 5% your target and failing to exit the trade in a timely manner. So, rather than setting up a goal for each trade, I simply trade the charts.

The technical indicators provide plenty of information for us as we trade the charts. It is always easier, of course, to look in hindsight at what we could have done. But it's still good practice, so we can learn what to look for the next time around.

Hope this little lesson is helpful in your trading.

By the way, I've added a lot of new material to the site in the last few days. You can always view the blog to see recent updates. In particular, check out the new Memebership Club I've started. If you want to trade the technicals, there's nothing quite like real-time to learn how to do it.

Hope you have a prosperous year.

I'll write again in two weeks.

Bob