We are looking at Yelp ( NYSE: YELP ) and here’s why: This is a really, really good technique that has worked very, very well lately; and that is taking these, you can call them slam trades, you can call them dead cat bounces, whatever, there are a lot of different names for them.
Some of these stocks, lately, have been absolutely hammered. Sometimes they gap down and just continue to move like Roku ( NASDAQ: ROKU ) did. It gapped down and those that bought 14 percent below, hopefully they are not still holding after another 17 percent move. These are not just reflexively, oh, the stock gapped down, must buy stock, make lots of money. It doesn’t work that way. But sometimes this thing works really well.
Yelp ( NYSE: YELP ) gaps down, you could hear the bulls collectively “yelp”; down over 30 percent, right? And so if you look at the way this stock traded today the money is made right off the bat. If I went down to a minute chart I have got a feeling I know what we would see. Yes, right off the bat here the stock comes in the first minute of the day, does not move lower. You go ahead and buy the stock. You set your stop slightly below the opening bar; not the opening print, the opening bar.
It actually took 3-minutes here, you can see this little teeny-tiny tail here that really kind of marked the low. So you are buying somewhere in here with your stop a little bit below and then just let the market do the rest. You don’t have to do anything. You just leave your stop there. As the stock runs up a bit, if you want to, you could use a trailing stop. You can actually be pretty confident that when a stock gaps down over 30 percent, opens, moves up a bit and does NOT immediately fall lower. You can pretty much be confident that this was a real selling climax.
Then the only question is, how far will the stock move up? Will it rebound quickly and significantly? Or will it just kind of drift upwards? It is likely to do one of the two. A stock that gaps down this much and does not almost immediately continue at the open is not a stock that is going to resume selling. Roku ( NASDAQ: ROKU ), you can see here the stock gapped down and unlike Yelp ( NYSE: YELP ) it did not move up, instead, it continued lower. This is really the differentiation between a stock that is a gap and reverse and a stock that is just a gap and crap; it just continues to move. The difference is what happens the first few minutes of the day.
Once you get that figured out, again, just let the market take care of it for you. Don’t over think it, you really don’t have to be that smart to trade well, you really don’t. I’m proof positive of that. You don’t have to be that smart you just have to be disciplined and you have to know a few things. And then you have to be smart enough to know that saying, “Oh, this time is different,” is generally a dumb thing to say because most of the time this time is not different, this time is the same; which is why I have a saying about trading and it’s, expect the expected. Otherwise, known as don’t over think things dummy.