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We’ve all sat and watched a stock just rolling up like it has no cares in the world.

Each time it pulls back, it stays above the previous low.

Then it moves back up to break above the previous high, creating another swing higher.

This is what I like to call a stair step pattern.

And it’s one of my favorite patterns to trade.

This is a pattern formed by a strong stock… and there are actually a number of ways to trade it.

Such as playing the pullback at support or buying on the next break of a high.

But don’t worry, I’m not leaving you with just that…

Today I’m going to walk you through some charts to show you what it looks like.

 

Basic Stair Step Pattern in Advaxis, Inc. (ADXS)

I put a clear visual of this pattern in the chart below so you can really get to know it.

Basically this is a pattern of higher highs and higher lows… the stock is “stepping” up.

With a stair step trade, it’s key that the pattern exists first. Seems simple enough, but look at the chart below…

There’s a leg up, then a leg down… at that point we don’t have a stair step pattern yet. We need a second leg up to complete the pattern.

Two key points here: There must be a higher low on the step down, and the pattern isn’t complete until it breaks above the high of the previous step up.

If you were looking at the chart below, what would you do with it?

I hope nothing… There is no pattern here. The stock moved up and then moved down, that’s it.

To complete the formation, we need to get a move back up above that black line (previous high).

At that point the stock has formed a stair step pattern (as seen in the first chart above).

So how do we trade the chart below?

We simply wait… (until it breaks the previous high/ black line, it’s still in a downtrend).

In the next chart, you can see when ADXS broke above the black line (previous high), it was now making a step higher.

A potential trade here is to buy the break of the previous high…

Another key to the stair step: Increased volume on the breakout.

Notice the spike in volume on the break above the previous high in the chart below.

This is key. An increase in volume gives me confidence in the move.

This also provides liquidity to get in and out on the potential move up.

Now you probably want to know how to find a target.

When it comes to penny stocks… I don’t want to hold them too long.

After all it’s just a penny stock, not an investment.

So what I like to do is look for the next levels of resistance to find good target ranges.

In the case of ADXS, you will notice the 200 day MA is sitting at 1.15, just above the breakout.

That makes for a good short term target as I would expect the stock to hit some resistance in that area.

As with anything, the more things that line up the better.

When looking at the pullback, the stock also bounced off the 50 day SMA.

Holding support at a major moving average on the higher low just gives me one more show of strength to add to my analysis.

I love this pattern.

In fact, I am searching for stocks that are making higher highs and higher lows every day.

Here’s a chart of a recent watchlist pick…

Hertz was stepping up for over a month. There are multiple opportunities in this one chart alone.

All from understanding how strong trending stocks move with higher highs and higher lows.

Well there you have it, one of my favorite chart patterns… The Stair Step Up.

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

It’s all about the meme stocks lately.

Gamestop (GME) being the one that really opened eyes to what was a new phenomenon in the stock market…small account retail traders banding together to push back against the big hedge funds.

And since then, it hasn’t slowed down one bit with AMC rocketing to over $70 at the beginning of the month and CLOV spike to nearly $30 a few days ago, among many other names talked about in the Reddit community.

But something that is often forgotten…

None of this would likely be happening without the rise of zero commission trading accounts.

A big part of those trades taking off is people being able buy and sell small numbers of shares quickly without any upfront cost, allowing big groups of small account retail traders to band together and push these stocks to new heights.

On the surface, no commissions sounds great. But there’s actually quite a bit of controversy surrounding it all.

So the question still exists….Is it good or bad?

 

Payment For Order Flow

 

This is the system Robinhood used to revolutionize trading for the small investor.

Unheard of up until then, Robinhood came out with commission free trades.

At first it seemed like there was no way they would be able to stick around without charging commissions.

After all, where would their profits come from?

Enter payment for order flow.

What’s that?

Basically… a brokerage firm, instead of sending orders through the exchanges, directs orders to a particular market maker for trade execution…and receives compensation for doing so.

The system helps brokers make enough money on the back-end so they can more easily charge zero commissions for trades.

This is how Robinhood gained popularity with retail investors and changed the industry along the way.

As other brokers have followed suit, being charged commissions is now a thing of the past for most regular retail brokerage accounts.

It all seems simple enough…brokerages get paid by the market makers and traders get zero commissions.

Win, Win right?

Well not so fast…

 

The Controversy

 

In a recent analysis… Hitesh Mittal, the founder of BestEx Research, found that the top five market makers seem to get 24.5% price improvement for retail investors’ trades, compared to the National Best Bid and Offer (NBBO) prices on exchanges.

Which seems great for everyone… but Mittal also found that those trades would get even better prices if the retail trades were all done through exchanges.

Mittal’s analysis in The Good, The Bad & The Ugly of Payment for Order Flow shows that overall spreads on trades could drop by 25% if all trades were moved to exchanges.

So Robinhood and other brokers argue that they are offering price improvement with payment or order flow.

The problem is that they are comparing executions to the NBBO on the exchanges and don’t take into account what spreads would be if all trades were sent to the exchanges.

Another question is oversight, what if the broker selects a wholesaler because it pays more rather than because it executes trades at the best price for the retail customer?

If you remember the trouble Robinhood got into just a while back…the SEC found that they had been cutting deals with market makers that were bad for their customers… (They have since changed their practices to fix the issues).

What’s Next?

 

Just this week…Gary Gensler, chair of the SEC, said that they will be reviewing payment for order flow and there could be amendments to the current market structure rules.

The way things are now, brokers would be at a competitive disadvantage if they stopped using it.

And this is why the SEC is looking into it… it’s a regulatory issue.

They won’t be the first to question it however… Market regulators in the U.K., Australia, and Canada have all stepped in and banned payment for order flow.

And this brings us full circle to the meme stock phenomenon.

Without the payment for order flow structure, it’s unlikely that brokers could sustain a zero commission model.

And if commissions came back, that could affect the volume in meme stock trades as those trades partly rely on the ability to buy and sell small numbers of shares quickly without any upfront cost.

I don’t know what the SEC will end up doing, but it’s something to keep an eye on as it could affect the zero commission model.

It’s worth noting that the payment for order flow structure has been around for a long time and it’s been investigated in the past…yet always allowed to continue for a number of reasons.

It would also be hard to stop the movement of a zero commission trading industry. Retail traders wouldn’t be happy at all…so speculating here, but most likely the SEC will just look to add more structure and oversight, or more open reporting from the parties involved.

We’ll see…

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

I’ve seen stocks fill the gap, both up and down.

For instance, I took a trade in FAMI a while back.

Here’s the chart…

After the gap down at the end of April, it made a high at .51 before pulling back and consolidating.

What I liked from there was the move back to the .51 high for a push-through into the gap.

And now I’m eyeing another stock chart that looks very similar…

Specifically, I will talk about what a gap fill is, why it happens, and show you a chart trading near that level.

Stock Gap

A gap happens when a stock opens lower than the low or higher than the high from the previous day, creating space between the bars on the chart.

Look at the chart below…

JOB hit a low of .837 and closed at .85 on April 14. It then opened on April 15 at .56, creating a gap down on the chart.

Why does this happen?

A gap is simply an imbalance between buying and selling orders stacked up from when the stock market closed one day and opened the next.

Generally, this imbalance is caused by significant news coming out while the market is closed—this could be earnings that miss or beat expectations, a new product announcement, lawsuit, fraud, etc…

Or, in the case of JOB, the announcement of a public offering for 83M+ shares at .60.

The good news is that stock gaps provide us with great trading opportunities..

And one of my favorite plays on a stock gap is the gap fill—this is when the price of the stock trades back through the gap, closing the space on the chart.

When a gap forms, it’s like a psychological void without any specific support or resistance. So when a stock can break into it, there is the potential to trade through it…also known as filling the gap.

There are no guarantees, of course. The stock gapped for a reason, so it’s not a blind buy and hold here.

Sometimes a stock that gaps down/up and then attempts to retest it… or even trade into it a little… before turning on a dime and continuing down/ up.

It’s just one piece of the puzzle, and that’s why I always use multiple tools when assessing a potential trade.

Currently, GEE Group, Inc. (JOB) is flirting with the gap created back on April 15.

Let’s take a look…

GEE Group, Inc. (JOB)

GEE Group, Inc. (JOB) provides permanent and temporary professional, industrial, and physician assistant staffing and placement services in the United States.

As mentioned earlier, the company announced a public offering of over 83M shares at .60 for $50M in proceeds along with an over allotment of 12M shares at .60 for $7.5M which closed on April 28…

GEE Group used the proceeds to pay off $55,000,000 in aggregate outstanding indebtedness under its existing Revolving Credit, Term Loan and Security Agreement.

While not great for the investors holding shares beforehand… it definitely puts them in a better position going forward.

But there’s always the question as to why they were in such bad shape in the first place. Was it just due to the pandemic or is there an underlying issue with business strategy or management?

I’m not looking to invest long term, so I don’t get too involved with those questions.

I’m really only concerned with what the chart is telling me in the short term.

So let’s take a look at that…

When the company announced the share offering, the stock opened the next day on a gap down to .56… remember the offering price was set to be .60. You wouldn’t want to buy a stock at .85 when they are offering 83M shares at .60 either.

The over allotment closed on April 28 and two days later the stock made a high of .68 before pulling back and consolidating in the .50s.

We haven’t seen the upper .60s again until now…with the high yesterday coming in at .66 and the stock closing at .65.

Looking at the chart, the 50 day MA line is at .70. And as a short term trader, that’s the area I would target as the next resistance…

But to fill the gap completely JOB would need to get up to .85…

Pulling back some today, the stock hasn’t been able to break above the previous high at .68.

I’ll be watching to see if it can hold above the 20 day MA support and the .60 offering price.

Value in the Charts

Something I always find interesting when looking at big moves off an announcement is that the stock often moves ahead of time.

Take a look at the chart for JOB below.

Notice how the stock was tanking for 2 days going into the announcement.

The announcement happened after the close on April 14, which is why the stock gapped down the next day to .60.

So why was the stock tanking so hard before the announcement was made public?

Makes you wonder who all got the news ahead of time and how…

Either way, it happened…and seems to happen a lot, in my opinion.

And that’s why it’s important to read the charts. The charts sometimes show us information we don’t know anything about yet. Don’t fight them.

So will JOB “fill the gap?”

I honestly don’t know, but I like the comparison to FAMI right now.

….creeping up to a previous high breakout into the gap, riding the 20 day MA, with the 50 day MA above…

But ultimately I listen to the charts, so I’ll be watching to see if it Fills or Fails…

At this moment it’s down from yesterday’s close, so I would like to see it hold the 20 day, and hold the .60 offering price as well.

Just think… over 83M shares were registered at .60. If it goes down, those are all underwater.

Something to keep in mind as you watch the stock react at these levels.

Before going out and taking trades on potential gap fill plays… look up gaps every day, track them and watch what happens.

Look for clues and cues in the charts, and soak up all you can. Notice when they fill vs. when it’s best to trade with the gap.

Well, that’s it for me…good luck gang.

 

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.