Mind those gaps

As a football player in high school, one key element of defensive line play that I was taught was to play gaps in the offensive line. Many of our defensive plays involved exploiting various gaps in the line with stunts, crosses, etc. Success was not always guaranteed, but I was rewarded often enough with my "gap fill" plays.

The same holds true in stock movements. One type of trade that I do is called a "gap fill". This stock movement can be either up or down, but typically the play involves a stock that has gapped down - then begins finding buyers at a support level.

I differentiate this play from a "knife catch" in that I only focus on this move after the knife catchers have done their job. The stock is skipping along a horizontal support line while it begins to build a new base. Once I feel confident in the horizontal support, I begin to stalk for any sign of building strength. Once I see the strength, I begin to plan my scaling in strategy to "fill the gap" above.

A recent example that I would highlight here is SKX (Skechers USA Inc.). In late October, this stock gapped down from 23 to under 20 in one day. The stock then churned around this level, and after a week I began to scale in to a long position. I had a full position once the stock closed above the 8d EMA. On November 24, the stock had successfully filled the gap above to close above the 23 level.