<< BTW - How does one tell a professional gap down vs a retail exhaustion gap. >>
First of all, this applies to stocks that are traded actively by institutions and professionals, but it does not apply to low float/low volume stocks. So in general, the stock should trade at least 500,000 shares/day, and preferably 1 million or more.
Professional gaps tend to be characterized by very high volume, whereas retail gaps tend to occur on normal or even low volume.
Professional gaps typically mark the beginning of a new trend, whereas retail gaps typically occur much later in that same trend, and most often indicate that the trend is nearing an end. In fact, those whose buying and selling caused the professional gap in the first place will frequently use retail gaps as buying and selling signals. Alternatively, they may try to squeeze just a little more out of the trend before they move the opposite way. There are various methods at their disposal for doing so.
For example, you may see a professional gap up on huge volume in a stock which had previously been hammered, or was basing. Typically, you will also see nothing forthcoming from analysts at this time. The uptrend will continue, and then eventually towards the end of this uptrend the analysts will rise from the dead and begin issuing upgrades; a retail gap then occurs, and the professionals prepare to exit, but first they have their analysts issue more upgrades, to sucker in the last of the retail bag holders. They also "leak" the "hot stock tip" to the financial press, and Maria and crew at CNBC and so forth will begin talking about it, and you will see it highlighted in various financial publications, and the threads will heat up also. Then suddenly the professionals, having decided that they've suckered in the last of the bag holders, will inexplicably exit en masse; sometimes the excuse will be some event, such as earnings (good or bad), or news, or whatever. But it would have happened anyway, you can be sure. Then, you'll see a big gap down on huge volume, even as the hype continues, the threads blather on, CNBC gushes, and the CEO's picture graces the cover of some financial rag. Nobody catches on, the threads insist WE'RE GOIN' TO THE MOON TOMORROW !!!, but the buying pressure is gone, and the stock collapses. Eventually, the retailers give up the ghost, and there is a gap down on smaller volume, and the professionals reload for another round. They then have their analysts---largely silent during the downtrend---issue downgrades, to squeeze out the last of the B&H bagholders, so they can pick up shares as cheaply as possible for the next round.
Example:
askresearch.com
Left to right, you'll see a professional gap up at 60, retail gap up at 130, topping formation followed quickly by a professional gap down at about 130, then much later by a retail gap down at 70. And once again, the professionals have prospered, the bagholders are holding empty bags, and nobody seems to remember that Maria was talking out the side of her neck and the analysts couldn't have been wronger if they had set out to do so (which, frequently, is precisely the case). The analysts get raises, Maria gushes on out the side of her neck, bagholders continue to read and pay attention to the analysts and listen attentively to Maria---and the professionals reload for another round.
Things are not always clear, of course, particularly since the big boys don't make a practice out of telegraphing their punches, and instead seem to be getting more and more adept at disguising their true intentions and actions. But when you see these types of gaps, they are very, very strong signals. IMHO, these are the unmistakable footprints of the elephants and the mice.
JMVHO, as always.......
Walkingshadow |
