The Breakaway Gap Syndrome Explored

ACOM closed up yesterday and the put was about $3 at the close so I was only down about 50 cents from my purchase price and $1.40 from the previous close, OUCH! Shoulda sold it Friday but really not bad for me as a newbie. This morning ACOM made a run up and tried to go up, yet so far in spite of an up day on the Dow ACOM can't seem to bust through yesterday's highs or the opening highs this morning. According to both Jon and Steve Wirrick the definition of a downtrend is lower highs and lower lows. So far ACOM is still in a downtrend by their definition. I've figured out that once a stock gaps down there are still people who have sights set on buying it a bargain price should it get there. So buyers remain at that low price and they come in after the initial down day/s and run the stock back up a ways. If you've purchased stocks before you've probably done that, too. I know I have, thinking I was lucky to get a break to buy at that lower level not realizing it's probably going to go even lower yet. (Just the reverse is true if it's a breakaway gap up). Once those bargain buyers/sellers are out of the way the stock is then free to resume its new trend down in the case of ACOM. After rushing up to its high, so far, for the day at the open it is now going down again resuming its downward trend...I hope! We will see. I think the stock will go down $12 from here which would make my $25 put worth about $15. Not bad for an investment of $3.50... if I can hold on.

Now what does this mean for LOW? I thought yesterday maybe I shouldn't be in such a hurry to jump on the bandwagon down. So, I didn't buy the put on it and decided to wait to see if my theory would prove out with LOW and so far it has done the same as ACOM, and HUM also did this to me a couple of weeks ago, too. I bought my HUM puts immediately after the breakaway gap and just about got faked into bailing out at a huge loss as the stock went back up quite a way for two days before the mini rally petered out and the sellers (bears) were able to dominate without as much competition from buyers (bulls). I was richly rewarded for hanging on by more than doubling my $1.95 investment to $4.45 and could have done far better if I'd held on longer down to my $74 target I'd estimated Hum would go to and it did. The low was $73.71, May 21st, before it started back up.

So, based on past history of my breakaway gaps, I guess I will see if I can buy a put on LOW, perhaps today, since it seems to be getting the bargain hunters out of the way today. So far it has been up from yesterday's close by 54 cents and has now backed off a bit to only up 36 cents (I really miss not having a cent sign key like I had on my old Smith Corona portable, does that date me?). Back to you later if/when I purchase the LOW puts. I will be looking at a 1 day chart with 5 minute bars to see what volume is doing, etc. and to determine a good jumping in point if possible. I'd like to figure out a good system for entering these gap trades.