| Gaps |
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Gaps A gap is a formation caused by a jump in price from one point to the next; it is noted for its relationship to support and resistance lines. It is an open area on a chart created by prices trading entirely above or below the prior trading range. Gaps will usually occur at the point where prices break out of a clearly identified formation, such as a long-term trend line, a consolidation area, or during a prolonged major price move. Gaps are the result of either extreme demand (upside gap) or over supply (downside gap); it is the consequence of a lack of speculators willing to take the opposing position causing a thinly traded of iliquid market. In the most interesting situations, the breakaway gap is the result of many stop-loss orders placed at new highs or lows, at major trend lines as protection against unfavorable break outs with respect to existing positions, or as an entry to a new position. The breakaway gap usually signifies a change from the previous, well-established pattern. The common gap is the least glamorous. It occurs within a well-defined trading range or pattern, and is not indicative of a change of direction nor does it have other special attributes. Hence it is called "common." Both runaway gaps and mid-way gaps refer to those price jumps occurring within a strong trend. They are associated with periods of illiquidity within a move; this could be the result of additional news to encourage the bulls or bears, or it could be a critical chart formation or anticipated reversal point that fails. Runaway gaps indicate stronger moves. The exhaustion gap or island reversal is the culmination of a major move; unfortunately, it is a formation only identifiable after the fact. If the price move has been exceptionally extended, it is likely that the first gap reversal will be the beginning of the trend change; however, there is a great risk associated with it. Gaps are a hindrance rather then an asset to trading. A breakaway gap usually causes stop-loss orders to be executed far away from the started price. If a long position is entered in anticipation of a break out, that break out never occurs and a high price is guaranteed. If the breakaway gap occurs on light volume, a position might be entered on a pullback. In the final analysis, if the break out represents a major change, a trade should be entered immediately at the market price. The poor executions will be offset by a single time when prices move quickly and no pullback occurs. A breakaway gap on high volume should be more indicative of such a major change. Many traders believe that prices will retrace and "fill the gap" that occurred sometime earlier. There are analysts who never give up, but waiting to fill a a gap that is more then 2 years old may be carrying this technique too far. There is no doubt that the gap represents an important point at which prices move out of their previous patterns and begin a new phase. The breakaway gap will often be a position just above the previous "normal" price level. One the short-term demand situation has passed, prices should return to near-normal (perhaps slightly above the old prices), but also slightly below the gap. Note: You can click on the alerts. 
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Gaps Gaps are caused by the next entire price range trading above or below the previous entire price range. Example. Today's price range is from a low of $1 to a high of $1.20. Tomorrow's price range is from a low of a $1.25 to a high of $1.32. As a result the price never traded between $1.20 to $1.25 there by creating a price gap. Trading history in stocks generally shows the price eventually will trade through this gap. When a trend is moving towards a previous price gap, either up or down the break from the previous trend to the current one can be an excellent entry point, with a target being the other side of the gap. |
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