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UNDERSTANDING GAPS. ES open gaps. TYPES OF GAPS. 3 TYPES GAPS 1. BREAKAWAY —BEGINNING OF TREND-HIGH EMOTION 2. CONTINUATION —MIDDLE OF TREND-CAN SIGNAL HALF WAY POINT OF ENTIRE TREND. 3. EXHAUSTION —END OF TREND
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TYPES OF GAPS • 3 TYPES • GAPS • 1. BREAKAWAY—BEGINNING OF TREND-HIGH EMOTION • 2. CONTINUATION—MIDDLE OF TREND-CAN SIGNAL HALF WAY POINT OF ENTIRE TREND. • 3. EXHAUSTION—END OF TREND • “OLD WISDOM ADVISES THAT GAPS GET FILLED” HOWEVER SOME GAPS NEVER FILL. • THE IMPORTANCE OF GAPS RELIES on LOCATION, EXTENSION, AND VOLUME. • WHAT TO LOOK FOR: • LONG BARS –TEND TO PREDICT FOLLOW THROUGH IN DIRECTION OF GAP. • SHARP GAPS THROUGH CLEAR RESISTANCE -THAT SIGNIFY BREAKOUT. • HIGH INTENSITY GAP LATE IN THE RALLY- CAN SIGNAL THE END OF THE TREND.
A GAP UP IS WHEN THE STOCK OPENS HIGHER THAN ANY PRICE IN THE PRIOR DAYS RANGE AND STAYS ABOVE THAT RANGE FOR THE ENTIRE SESSION. LOOKS LIKE A BLANK SPACE ON THE CHART. GAPS ARE OFTEN CAUSED BY HIGH EMOTIONS AND ARE OFTEN RETESTED TO TOP OF GAP OR TO FILL GAP, HOWEVER, CONTINUATION GAPS USUALLY DO NOT FILL, AT LEAST FOR A LONG TIME, BECAUSE OF THE CROWD INTENSITY. • THE STOCK CAN MOVE UP DIRECTLY AFTER THE INITIAL GAP UP, IT CAN CONSOLIDATE BEFORE FOLLOWING THROUGH, OR THE GAP CAN FILL.
UNDERSTANDING THE TYPES OF GAPS AND CHARACTERISTICS OF THE IMPORTANT GAPS CAN HELP YOU TO STEP IN TO WHAT APPEARS TO BE A RISKY ENTRY. • 1. STOCK MUST HAVE ALL CANSLIM CHARACTERISTICS-STRONG EARNINGS, INNOVATION, ACCUMULATION, LEADER, STRONG INDUSTRY GROUP, AND MARKET IN AN UPTREND. • 2. CHART PATTERN MUST SHOW THE CHARACTERISTICS OF A SOUND BASE. • 3. STOCKS WITH WEAK FUNDAMENTALS AND SLOPPY BASE CAN GAP UP—BUT THESE GAPS OFTEN FAIL. • 4. KNOWING WHICH GAP AS IT IS LOCATED IN THE PATTERN-PARTICULARLY AS A STRONG BREAKOUT CAN HELP YOU TO ENTER THESE POWERFUL MOVES THAT CAN LEAD TO BIG GAINS IN A CONFIRMED UP TREND.
EARNINGS RELEASES OFTEN TRIGGER GAP UPS. ENTERRING A TRADE PRIOR TO EARNINGS RELEASE IS A GAMBLE, BUT MANY TRADERS DO NOT WANT TO MISS THE POTENTIAL GAP UP AND THEN GET STUNG BY A GAP DOWN WHEN EARNINGS DON’T MEET EXPECTATIONS. A FAR LESS RISKY POSITION IS TO BUY THE GAP UP PROVIDED ALL OTHER CRITERIA ARE MET AFTER THE EARNINGS ANNOUNCEMENT. • GAPS THAT FILL CAN ALSO BE A SIGN OF STRENGTH PARTICULARLY IF THE IF PRICE BARS RETEST THE PIVOT. CAN ALSO WATCH FOR GAP TO CLOSE AND THEN STRONG CLOSE ABOVE THE 10, 21, OR 50 DMA. WHEN WATCHING A GAP THAT CLOSES LOOK FOR LOW VOLUME, ORDERLY, AND TIGHT BARS JUST LIKE ANY OTHER RETEST OR CONSOLIDATION. • CAN USE THE 60 MINUTE CHART ON A GAP OUT OF THE PIVOT TO BUY AT A BETTER PRICE, HOWEVER, IF MARKET AND STOCK ARE STRONG PREPARE TO MISS THE TRADE. AND REMEMBER THAT CONTINUATION GAPS USUALLY DO NOT FILL FOR QUITE A WHILE, OFTEN YEARS. • STOP FOR BUYING GAP REMAINS THE SAME.
