Major Gap Fade in IMCL

Sep 18, 2007: 11:11 AM CST

ImClone stock probably is most famous for being the stock that “took down” Martha Stewart for potential insider information, but I wanted to show a recent power move and major gap fade that occurred within the last week for education’s sake.

Ouch.

Traders who bought – and there were many who did – around September 10th are hurting quite badly now.

Now, this gap defies most gaps, in that we can expect a momentum push that gaps a stock upwards (or downwards) greater than 5% is expected to continue because of the major imbalance, but still the first ‘impulse’ is to “Fade a Gap” that occurs.

In this case, the gap fade strategy would have been very profitable literally from the start with little resistance until it refilled or retested an area $1 higher than where the original price closed before the gap.

The second impulse (or trade) following a successful gap fade is to play the momentum in the initial direction of the impulse, which is potentially what is unfolding before our eyes. ImClone also – obviously – made a new momentum high, which is observed both in the oscillator and in the gap impulse itself. The reaction against the new momentum high has occurred, and we have a high-probability trade set-up to the long side with a clear risk level defined.

Stops – for a long trade entry – should be conservatively below $38 or aggressively further below $38. It’s still best to play for a small piece of the swing, perhaps to $43 or $44, but aggressive traders can try to capture the entire potential upswing to $47. It’s probably best not to play for a target above that just yet.

Anyway, ‘let this be a lesson’ in gap fade strategies. ImClone recently showed us an ‘extreme’ case of a profitable fade the gap play.

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