That is when one looks to daytrade based on solid risk/reward parameters using a 2 minute opening range breakout. That can apply whether the stock has either gapped up or down. The important factors are twofold: the risk must not exceed the reward (stick to a 2:1 ratio) and the momentum must occur immediately.
Here's a perfect example:
This is a screenshot of our scanning tool Hotscans. Before the market opens, especially during earnings season, checking to see which instruments are up on good volume is a great way to gauge a possible daytrading strategy after the opening bell. CAGC is highlighted in yellow. Earnings had come out at 9:00 AM EST before the open and had reported positive. CAGC was already up 2% with 884% greater than average volume on a day when the market was due lower.
On the daily chart, CAGC had a great potential setup. First, it spent 3 days under the Floor Trader Pivot, yet held the 10 day moving average (denoted in cyan). Plus, the 10 had crossed the 50 (blue) day moving average a couple of weeks prior; and even with overall weakness, the 30 (pink) had managed to also cross the 50 day moving average the day before. A slightly oversold stock that held key moving averages-a scenario I look for. Also note that CAGC was therefore under the 200 day moving average (green); a daytrading first target and area of resistance was clear as well.
On the one minute intraday bar chart with all of the reference points we use, I could see that CAGC opened above the Floor Trader Pivot after 3 days of closing beneath it. The previous day high, the 2 and the 5 minute opening range high all corresponded around the same price. I place a buy stop over that area and get filled at 14.80. The risk is to under the opening range low or 14.10 - not an amazing risk for a daytrade given that CAGC has an average true range of $1.15. However, with a post earnings play, time and momentum are equally important. Had the stock floundered after I got filled, I could have gotten out sooner than the initial stop, figuring that the earnings play could not yield enthusiasm given all of the other aforementioned parameters that also lined up with the breakout of the opening range.
However, CAGC did begin to run up. First target was R3, where - considering the Dow Jones Industrial Average had begun to drop - I thought was a good place to lock in 1/2. Now, I could place a no loss stop on the balance and let it go playing with "their" money. As the stock continued to rise, I sold the remainder at 16.90 using a limit order. I chose that price as it had been a level of resistance dating back from May 13th and May 17th when it spiked up to 16.97 and 16.86 respectively. The DJIA had closed down 265 the day before and continued to drop that day.
Ordinarily, for a stock such as CAGC, I would consider a miniswing or swing trade on a post earnings play with the type of technical setup I describe, but one must always consider the overall market. On this day, I took advantage of the post earnings volatility, yet kept in mind that I needed to see the momentum immediately as CAGC was going counter to the market. As a daytrade, I had no overnight risk or angst - just a clear intraday risk with good profit potential!