5-d

The Gap Trading Technique.

Price gaps can be a dilemma for many traders. The general rule denoting market s
trength or weakness after a high volume gap often comes up short after the initi
al reaction is over. Many "gappers" simply run out of steam. A high volume gap i
n itself seems to offer precious little evidence that a profitable move is about
to get under way.
Dr. Andrews used price gaps somewhat differently than others. He counted a gap a
s 2 pivots. Please refer to the the S & P 500 chart that accompanies this lesson
part to see how the gap trade technique worked to signal a buy at a probable P5
market bottom:
The P5 low that preceded the gap was labeled as p0. Counting the gap as 2 pivots
, the pivots were labeled p1 & p2. After p3 had formed, and prices reversed towa
rds a short-term p4, a horizontal line was drawm slightly above and to the right
of p3. (exact distance is trader preference) Enter the market only if prices pe
netrate that line within a few days after reversing from p4.
The procedure is reversed for a sell signal at a probable P5 market top.
As a point of interest, Dr. Andrews found this technique to be most effective wh
en the configuration appeared shortly after a significant P5 had formed. (usuall
y no more than a few days or so, he said)
Included as an attachment you'll find a detailed drawing that illustrates how a
buy signal was given at a potential market bottom. Study your own charts to find
an example or two where the gap trade technique could have been used at a poten
tial market top or bottom, and then please send me a sample when you're ready.