Mind the Gap, Make Some Money

Hey there! My name is Nate Thomas and I will be writing for WOLF Financial every week. If you enjoy learning about trading you can find my newsletter, A Trader’s Education, and more of my content on X @tradernatehere.

This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.

We have seen big action in familiar names and a lot of it has been taking place outside of normal trading hours.

You have to love reported earnings and the moves they bring.

These moves create gaps between the closing price on a given trading day and the opening price on the next.

You’ve seen it twice now in just six months with NVDA which has been on fire all year.

Why are gaps important?

They create opportunities and whether you have your trader hat or investor hat on, you should always be looking for opportunities.

This week we will dive into an example of how to utilize the gap fill strategy successfully with DraftKings - DKNG.

Also, be sure to read to the end as we have something new just for you, exclusive trade ideas for the loyal WOLF Newsletter reader!

Ok, now let’s get back to it with a chart for DKNG.

There are actually four gaps on the one year chart for DKNG but it is this last one that we are focused on.

First, it is worth taking a minute to understand the different types of gaps that form.

1. Common Gaps - the most frequent type and most likely to fill as they do not signal a trend and occur due to normal price fluctuations.

2. Breakaway Gaps - occur after shares have been trading in a range, consolidating, and then breaking out, typically signaling a direction

3. Runaway Gaps - go with the trend and further confirm it, jumping in price and suggesting momentum is gaining.

4. Exhaustion Gaps - happen after a prolonged move in one direction, reversing, and potentially signaling a change in trend.

Of the four types of gaps, both common gaps and exhaustion gaps are the most likely to fill as they’re not signaling a breakout and momentum is not picking up.

Instead, profits are being taken or minor news events are causing a brief disruption to the trend, but the trend often continues.

The great thing about the DraftKings chart is it not only has gaps, it has examples of each type of gap.

Zooming out a bit, you can clearly see each one.

How to Execute the Gap Fill Strategy

Now that you understand the types of gaps to look for you can start to trade them accordingly.

As noted, the most recent gap for DKNG was an exhaustion gap and that’s a gap that typically gets filled.

The opposite of that is the Breakaway gap, which happened after a period of consolidation from February through April and got DKNG running higher!

However, targeting gaps alone is not enough. You also need to incorporate technical analysis to help put the odds in your favor.

Look for bounces off of support, similar to the bounce at $25.34 that ultimately started the move higher for DKNG.

Has the trend since the gap happened reversed?

This is another piece of information to look for. You can see that after the bounce off of support, DKNG broke through the downtrend and has continued higher.

Also keep an eye out for catalysts.

DraftKings is the beneficiary of sports ramping up as we close out the summer and head into the fall.

All of this information adds up to a nice set up for a potentially great trade.

To recap,

• DKNG has an opportunity to fill an exhaustion gap.

• Support found at prior resistance ($25.34).

• Trend after gap down has been broken and reversed.

• Sports betting season is ramping up.

There have been buying opportunities along the way, most recently on the dip to the 50-day moving average after it held.

Congratulations to you if you got in on this great trade!

Exiting the Trade

Just as important as knowing when to get in a trade is understanding where the exit points are well before you put your money to work.

You will typically see one of two types of action after a gap has been filled.

The first is a quick reversal. This is a great spot to take some profits, at least trimming your position because the momentum is taking a hit.

The second is a powerful move right through the gap on strong volume. There is no hesitation, just a push right through.

When this happens, you naturally will want to hang on for the ride. And you should! That said, I always recommend taking profits on a big move higher.

On the other side of the coin, if the price action stalls after filling a gap, I consider this another sign to end the trade or at least take some off of the table.

For DKNG, the exhaustion gap was filled with strong volume in a week that was tough for most of the market.

Poised for more upside, we will see if momentum continues or if shares stall out here above $30 again. It is going to be another interesting week.

Take profits while they are there. That’s why we trade!