AVGO daily Dec 4th
The AGVO (Avago Technologies Ltd) short trade that was posted on Tuesday gapped up today on a positive earnings report & forecast. I have often discussed my trading strategy when caught on the wrong side of a large gap, which is to wait for the opening order imbalances to mitigate (typically 30-60 minutes after the open) and then place a stop-loss order just above the reaction high during that initial buying surge period (vice versa for short trades with the stop set below the initial reaction low).
Currently AVGO is trading just slightly above a 3:1 R/R stop level based on the 3rd & final target of 69.20 (based on the posted entry price). In placing a stop just above this morning’s high of 103.78, any additional losses on the position are limited while it is not uncommon to see large gaps like this, especially when the technicals were already warning of a likely reversal in the trend, to be the final blow-off top (i.e.-an exhaustion gap).
As such, AVGO will be considered stopped out on any intraday move above this morning’s high of 103.78. Should the stock go on to reverse from here, the first key support level would be the top of today’s gap, then the bottom of the gap, followed by the uptrend line defining the bottom of the rising wedge on this daily chart.
One possibility to look for, although not very common, would be an Island Reversal Top, which would occur should AVGO gap down tomorrow below the lowest price that the stock trades at today. Should that occur, a new short entry or add-on, with a stop set slightly above today’s low, would offer an extremely favorable R/R entry with minimal downside risk & unusually large profit potential as Island Tops, especially after strong uptrends, usually lead to primary trend reversals. Again, not a very common occurrence but one of the better risk/reward setups in trading out there.