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Technology Stocks : Digital Island,Inc - (Nasdaq- ISLD)
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To: Mohan Marette who wrote ()1/24/2000 3:01:00 PM
From: Michael Olds  Read Replies (1) of 1884
 
I dont think the discussion about gaps should not be left the way it is:

For the record, folks, the definition of Gap used by MileHigh is only valid for new stocks such as ISLD (where nearly all moves up are into new all time highs) or for stocks making new all time highs. The standard definition of Gap is an open above the previous day's intra-day high or an open below the previous day's intra-day low. This is the definition used by MetaStock. And this is the definition that should be used for any stock with any trading history.

Using the definition used by MileHigh a poster on Yahoo! did inform the readers there at the time of the Gap fill (1/13). Certainly some of the other posters there called the bottom in a timely manner, but it would not have been easy to sort them out from the vicious dialogue that was going on at the time between the bulls and the shorts. One poor fellow shorted 2000 at the close that day.

For those interested in the psychology it runs something like this: New buyers buying into a stock at a gap up open begin to doubt their decision at turn-downs thereafter; some sell, to lock in profits causing weakness; a selling trend emerges. Those who bought high have even more reason to doubt their decision and are even more willing to sell, to cut their losses, thus accelerating the trend. Savvy traders recognize what is happening and have no incentive to buy until the trend exhosts itself. This contributes to the weakness. Given positive fundamentals the indication that the trend is over is a lack of sellers at lower prices. This happens at the gap because the psychology for those who have bought below the gap is the opposite of that which applies to those that bought above: their buy decision is validated by the upward move which they expect to see confirmed after the gap has been filled. So they buy at this point and the cycle reverses. The reverse is the case for gap downs.

Since I have used up my lessons from Mile High, I am only guessing that a close above the trendline confirms the turn after a gap.

mo
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