Generally, on a gap down stock, the initial inclination is to look for short setups. However, there are certain clues that can signal a contra setup. One such clue is if the ORH (opening range high, generally the first 15 minutes) is broken.
In this particular example, $MILL broke out of the opening range shortly after 10:00 AM and quickly reached the 1.618 Fibonacci Extension (FE) at $4.30. It then pulled back to the $4 level and found support. On the 13th bar, a green hammer-like bar created the setup, and it was especially of interest since the high of the bar rested against the FE ($4.14) resistance level.
|$MILL 5 min|
This setup is one variation of what Trader-X calls Beyond the Fibonacci Extension (BTFE). But I also add that this is a contra style (i.e. fade against the gap direction) setup. For my trade tracking/journaling metrics, it might be more of a Pullback to the Fib Extension (PBFE) setup since it wasn't consolidating along the FE, but I'm still sorting out all out my administrative details.
- Buy on a break above $4.14 of the 13th bar
- Stop below $4
- $4.48 for the first half - since there's a 2.00 FE there as well as the usual $.50 natural resistance
- $5.00 to $5.16 area - The $5 is a whole number, and $5.16 is the prior day low. If price gets there, watch the tape/chart action and find any excuse to get out quick.
Worked pretty well. The first target was reached 15 minutes later, and the second target was reached within 30 minutes after the first. Assuming some slippage, you would have gotten:
- First 1/2: ~$.30
- Second 1/2: ~$.83
- Average: $.57