A fellow trader passed this one along to me (thanks B.), which could prove to be a very lucrative, albeit aggressive short trade. QIHU has been on an absolute tear this year but that mega-run may have just come to an end. Any move lower this week back below the 73ish area (below the gap) will sharply increase the odds that Monday’s gap was an exhaustion gap.
Exhaustion gaps happen near the end of a strong trend (up or down) and are marked by unusually high volume. In order to confirm that Monday’s gap was most likely an exhaustion gap, we need to see prices reverse very soon, preferably by the end of this week or no later than early next week. Aggressive traders might establish a partial or full position now with a stop somewhat over Tuesday’s high while more conservative traders might wait for confirmation via prices moving back below the 73 area. Once/if prices quickly move lower to backfill Monday’s gap & then some, that would be the cue to bring the trade to a full position, for those preferring to establish a partial position here.
The fact that yesterday’s new all-time high in the stock was accompanied by negative divergences on the MACD & RSI coupled with the fact that we QIHU had put in what appears to be a textbook continuation gap roughly in the middle of this run helps add to the case that a trend reversal may be very close at hand on this runaway stock. Continuation gaps, aka: runaway or measuring gaps, are often found around the middle of a trend.
Again, this should be considered an aggressive trade as QIHU has been in a very powerful uptrend & typically experiences very large price swings from day to day. However, I feel that the risk/reward is very attractive since a stop not too far above yesterday’s highs limits the downside risk if wrong yet the profit potential, if successful, is very large. I haven’t identified my profits targets yet but will most likely be looking at the 62 area & then the 49 area should we get the aforementioned confirmation of an exhaustion gap. Those targets would give this trade about a 5.5:1 and 10:1 R/R.