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Strategies & Market Trends : Three Amigos Stock Thread
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To: steven d. zapf who wrote (12969)1/22/1999 12:36:00 PM
From: Sal D  Read Replies (2) of 29382
 
Steven,
When a market is unusually strong or after a piece of bullish news, prices will sometimes open sharply higher usually well above the previous day's high. Conversely in a unusually weak market or after a piece of bearish news prices will sometimes open sharply lower usually well below the previous day's low.

Prices sometimes retrace a sufficient amount to fill all or part of the gap. Generally speaking in an up gap the gap area should provide support on any price dip and usually provides a good buying opportunity. Conversely in a down gap the gap area usually produces resistance on any subsequent price rebound.

There are different types of gaps.
The breakaway gap is a gap that forms on the completion of an important price pattern. A breakaway gap usually signals the beginning of an important price move. It is important for a upside breakout to be accompanied by a relatively high level of volume, it is more likely to be valid than one that does not. Gap breakouts on the downside are not required to be accompanied by heavy volume.

Runaway gaps occur during straight line advances or declines when prices are moving rapidly and emotions are high. Either they are closed quickly (in a day or so) or they tend to remain open for much longer, until the market makes a move in the opposite direction to the price movement that was responsible for the gap. They often occur halfway between a previous breakout and the ultimate duration of the move, and for that reason are also called measuring gaps.

Exhaustion gaps occur at the end of an important trend, it is the last in a series of runaway gaps and signals that the trend is ending.

There is also the island reversal, it is a combination of an exhaustion gap in one direction and a breakaway gap in the other direction within a few days. For example towards the end of an uptrend, prices gap upwards and then downwards within a few days. The result is usually two or three standing alone with gaps on either side. the island reversal usually signals a trend reversal when they appear at the end of an intermediate or major move and form part of an overall price pattern such as the top or bottom of a head and shoulders pattern or an inverse head and shoulders pattern.

Hope this helps. Good Luck.
Joe

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