“When a stock experiences a significant drop, creating a gap in the chart, there’s a high probability that the gap will be filled.”
Earnings season is in full swing, with giants like Boeing, Tesla, and hundreds of others reporting.
For traders like us, this is prime time.
Why?
Because it opens up a goldmine of opportunities for one of my favorite strategies: The Gift Gap.
Catalyst events like earnings reports and FDA announcements can trigger massive price gaps.
If you know how to play them right, these gaps can lead to explosive profits.
Case in point: my latest watchlist idea, Novavax (NVAX). I spotted this gem in seconds using my Gift Gap Scanner, and it’s a perfect example of how this strategy works.
Let me break it down for you…
On October 16 shares of Novavax (NVAX) fell roughly 30% intraday… the morning after the U.S. FDA put a clinical hold on the new drug application of its COVID-19 and influenza combination vaccine and standalone influenza vaccine candidates, citing a serious adverse event in a trial participant.
Shares went from a previous close of $12.60, to an intraday low of $9.62, before closing at $10.15.
Understanding the Gift Gap Strategy
The Gift Gap strategy capitalizes on a specific market inefficiency: the tendency for price gaps to get filled.
When a stock experiences a significant drop, creating a gap in the chart, there’s a high probability that the gap will be filled. And these gaps can get outsized thanks to investors’ overacting to the news.
This is our edge.
My team and I have rigorously backtested The Gift Gap strategy, with remarkable results:
- Over a 10-year period, we analyzed 3,735 gap down events.
- When targeting a 25% gap fill, our win rate was an impressive 97.11%.
- Out of 3,735 trades, 3,627 were winners.
- The average winning trade lasted just 4 days.
- Notably, 80% of these winning trades hit our target within the first two days.
The Gift Gap in Novavax (NVAX)
Let’s apply this strategy to the recent market event for Novavax (NVAX).
Here’s the breakdown:
The Gap Event:
Date: October 16, 2023 (following FDA clinical hold announcement)
Previous close (October 15): $12.60
Gap down open: $10.43
Intraday low: $9.62
Closing price on gap day: $10.15
Present Situation:
Current trading price: ~$10.18
Potential gap fill target: $12.60
Gap Size and Fill Potential:
The gap from $12.60 to $10.15 (closing price on gap day) represents a $2.45 drop (19.4%).
Our strategy typically targets a 25% gap fill, which in this case would be around $10.76.
NVAX is currently trading around $10.18, which means it has already started to fill the gap slightly.
Your Action Plan:
With the stock closing at $10.18 on Friday, we’re still looking at a substantial potential upside. A move towards filling the gap could unlock significant profits:
- A full gap fill to $12.60 would represent a 23.8% gain from the current price.
- A 75% fill to $11.99 would yield a 17.8% return.
- A 50% fill to $11.38 would result in a 11.8% gain.
NVAX has only begun to move from the gap day close of $10.15.
However, this early movement is encouraging and aligns with our strategy’s typical quick response.
Given where it’s trading around $10.18, consider setting multiple profit targets:
- Initial target at $10.76 (25% gap fill)
- Secondary target at $11.38 (50% gap fill)
- Tertiary target at $11.99 (75% gap fill)
- Final target at $12.60 (full gap fill)
Of course, when trading these setups I typically use options…
Which means even a modest move can lead to substantial profits.
I haven’t put a position yet, but this is one I’m closely watching.
However, the cool thing about the Gift Gap Scanner is that once you understand the strategy, you don’t have to wait for my alert.
In fact, one of our subscribers spotted the opportunity off the scanner, and reported profits of 25.9% in NVAX in just one day!
It’s that simple and powerful.
And with earnings season here, it becomes an invaluable tool.
