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Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: ViperChick Secret Agent 006.9 who wrote (13342)	7/29/1998 10:01:00 AM
From: Chris	Read Replies (2) \| Respond to of 42787

some more stuff on gaps. received via priv. msg. (thxs!) GAPS defined: A gap is a chart where the opening price is greater than the closing price of the previous trading session. For example, if IBM were to close on Monday at $115.50 and open on Tuesday at $119.75 this would be a GAP up. Conversely, if IBM were to open on Tuesday at $112.50 that would be a Gap down. Gaps occur when prices jump in response to a sudden imbalance of buy or sell orders. A scary piece of news often triggers gaps. Gaps on daily charts show reactions to events that took place while the market was closed. GAP Psychology: Gaps down show that the trading crowd is spooked, that losers are getting hurt and dumping their positions. When you know the Bulls or Bears are hurting, you can figure out what they are likely to do next and trade accordingly. Types of Gaps: Our focus will be on the three most important gaps used for trading. Breakaway Gaps - A breakaway gap occurs when prices leap out of a congestion zone (trading range) on heavy volume and begin a new trend. A breakaway gap can remain open for weeks, or months and sometimes years. The longer the trading range that preceded the gap, the longer the subsequent trend. An upside breakaway gap is usually followed by new highs for several days in a row, a downside breakaway gap is followed by a series of new lows. There is a sharp increase in volume on the day of the breakaway gap and for several days thereafter. Volume on the day of the gap may be twice as high as the average for the previous few days. Continuation Gaps - A continuation gap occurs in the midst of a powerful trend, which continues to reach new highs or new lows without filling the gap. It is similar to a breakaway gap but occurs in the middle of a trend rather than in the beginning. Continuation gaps show a new surge of the power among the dominate market crowd. A continuation gap can help you estimate how far a trend is likely to continue. Measure the vertical distance from the beginning of trend to the gap, and then project it from the gap in the direction of the trend. When the market approaches that target, it is time to begin taking profits. Volume confirms continuation gaps when it jumps at least 50% above average for the previous few days. If prices do not reach new highs or lows for several days after the gap, you are probably dealing with a treacherous exhaustion gap. Exhaustion Gaps - An exhaustion gap is not followed by new highs during uptrends or new lows during downtrends - prices churn and then return into the gap and close. At first, an exhaustion gap looks like a continuation gap - a leap in the direction of the trend on heavy volume. If prices fail to reach new highs or lows for several days after the gap, it is probably an exhaustion gap. An exhaustion gap is confirmed only when prices reverse and close it. This gap is like a tired athlete. He springs away from the pack but can't sustain the pace; as soon as others close in on him, you know that he will lose the race. How to trade Breakaway, Continuation and Exhaustion Gaps Breakaway Gaps - If a stock gaps out of a long trading range on a burst of volume and continues to make new highs or lows, you are probably dealing with a breakaway gap. If prices have gapped to the upside, buy and place a protective stop at the lower rim of the gap. A valid breakaway gap almost never gets covered. Reverse the procedure in downtrends. Tighten your stops when the trend approaches its target as projected by the continuation gap. Continuation Gaps - Trading a continuation gap is similar to trading a breakaway gap - buy early and place a protective stop at the lower rim of the gap, reverse the procedure in downtrends. Tighten your stops when the trend approaches its target as projected by the continuation gap. Exhaustion Gaps - Exhaustion gaps offer attractive trading opportunities because they are often followed by violent reversals. When you identify an upside exhaustion gap, sell short and place a protective stop above the latest high. Once prices start to slide, weak bulls will start bailing out. Stay short as long as prices continue to reach new lows and cover the day after prices fail to make a new low, reverse the procedure in downtrends. Because of high volatility, exhaustion gaps are easier to trade using options, especially buying puts at the tops.