CHARTING
Can Gaps Make You Money?
Gauging Gaps
by Thomas N. Bulkowski
Should you trade the gap? Here are some gap performance numbers to
help you decide.
Suppose you've been following a chart pattern.
Say prices gap upward, piercing the trendline in a breakout. Do you buy
the stock, expecting an unusually large gain? How long will it be before
prices return and close the gap? I will address those questions here.
GAP TYPES
Prices gap when today's high is below yesterday's low, or today's low
is above yesterday's high. A chart of the pattern will show a gap between
the prices.
There are five types of gaps: area, breakaway, continuation, ex-dividend,
and exhaustion. Figures 1 and 2 show examples. Common and pattern gaps
are synonyms for the area gap. As you can see in Figure 1, area gaps appear
most often, usually during a sideways price trend. Prices usually, but
not always, close the gap quickly, meaning that they return to the gap
location and span it completely, filling the hole left by the gap. For
example, the area gap in November closes a week later, but the early December
breakaway gap doesn't close until almost February.
Figure 1: Area, breakaway, and exhaustion gaps. Area
gaps are the most common, with breakaway gaps giving the best performance.
Exhaustion gaps typically appear at the end of a straight-line run,
as they did in December and October. Measuring and runaway gaps are synonyms
for the continuation gap. Figure 2 shows an example. It's a rare gap, and
it too makes its appearance during straight-line runs, with prices continuing
to move in the prevailing direction.
...Continued in the September 2003 issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the September 2003
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2003, Technical Analysis, Inc.
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