MY FAVORITE PLAY: OVER EXTENDED GAP DOWN SHORT

Hello guys and gals. Today the 18th of May was a pretty boring day. Nothing too exciting out there to trade. However there is one type of play in particular that has won over my heart. It is known as the Over extended gap down short. Let me give credit where credit is due. I learned this play from Tim Grittani in his excellent DVD. Let's talk about what makes up this play. And then I will post a great example of this set up from today CWEI

What is the Over extended gap down short. Well first off I want a DAILY chart that is extended to the upside. And when I say extended I really mean extended. Not only price wise but % wise too. Sometimes you may see a chart that is on day 3 or 4 but the range is nothing to write home about. It may pass the visual test on extension , but when you examine it closer it is only up 10% which does not allow it to make my extended list, Second, as the name says you want to see a gap down. I have noticed that in its best possible scenario the gap down is below an intraday level of support but not every time. It is also a bonus point when the stock is at a clear level of resistance on the daily. Adding fuel to the fire. Here is where most of the rookie mistakes happen. You see a gap down the stock may start to go red and you short it, only to watch it turn around and go r/g or close to it. You cover in frustration and bash your monitor against the wall ...well....we wouldnt do that now would we? Ok so the stock opens with its gap down , you need to assume that it is going to try and go green. Wait for it! Once it goes green or near to green and you sense weakness such as in a failed follow through type of play you short it. Remember that on a less than extended chart a gap down is a R/G set up and NOT a short. In this case though we are starting by noticing the daily chart being extended so now a gap down turns on your sirens for the extended gap down short. Let's look at CWEI from today

Here is the example I wished to show you today. CWEI moved from 18 area all the way to almost 30. It passes both the visual test and the % up test. This one as I saw it last night could be a great potential short. This morning it gapped down slightly and tried to make its r/g move. I would not touch it long because it was extended but i wasnt quite ready to short it either. So as soon as it starts to fail the r/g move that is when you pounce on it! And as you can see it wouldve paid off as the stock moved down all day. You also had a chance to short a flag later on in the day for the move lower. 

I will be posting more of these types of plays as it also helps me understand them better. What better way to learn. Hope you enjoyed this post.