Lee:
Here is my understanding of gaps.
1: Ex-dividend gaps also known as common gaps and area gaps are of no significance and get closed quickly.
2: Breakaway gaps, as the name suggests is a break away from a price pattern and on the upside is accompanied by high volume and on the downside, volume plays lesser role. If after-the-gap volume is heavier than before the onset of the gap, it is more than likely , the gap will not be filled in short term.
3: Runaway gaps, as the term suggests is a runaway event and an emotional event in the life of the stock. The stock should be coursing up or down, when this emotional event takes the price to a new downside or upside level. The level of the price ,after the gap is created, depends on the volume and the price level is proportional to the volume. The more the number of runaway gaps, say 3 or 4, the momentum will run out of gas and goes into what is called Exhaustion gap and results in Island reversal.
4: Exhaustion gap as the term implies, is a terminal event either on the upside or downside. Exhaustion gap is characterized by heavy volume disproportional to the price movement.
5: As the island reversal implies, there is consolidation, narrow price movement , congestion, and one gap on either side of the island.
6: Trading decisions should not made on gaps. Some gaps go unfilled and some take weeks, months.
7: Gaps provide support and resistance levels. Greater volume after the upside gap provides a strong support at the gap. Dwindling volume post-gap upside is a sign of feeble support.
I may be guilty of strong statements here. I am sorry. I invite comments .
Paul |
