Specialist Use Of Gaps On Charts
One of the most important things to
remember in charting is the specialists’ use
of “Gaps”. Whenever you see a Gap on a
chart, use it to draw your 15, 30, 45, or 60-
degree lines from or through that point. In
an up trend move it can indicate a support
line for a short term decline once the stock
has peaked or it can signal a resistance line
that the stock will meet every time it
declines and then tries to rally back. It also
indicates where the next 45, 60 degree up
trend resistance channel lines will be. Every
time the stock reaches that up trend angle it
will begin another move lower, and the high
will also be confined by high volume and big
block activity.
The three gaps that I am going to cover
follow each other in succession once the
stock breaks out of a charting formation.
The first of these gaps is called "The
Breakaway Gap". It generally occurs after
an important chart pattern has been
completed, and it often marks the beginning
of a major price move either up or down. An
"upward" breakaway gap is usually
accompanied by a big rise in volume, and is
likely to show a greater than normal range
between the day's high and low prices, in
other words a much longer vertical line on
the chart.
The breakaway usually represents some
major development has caused a
concentration of orders to buy or sell on the
specialist book at the market price. The
development often is an unexpected news
event, a stock split, dividend action, a
merger, better than or worse than expected
earnings, or something of sufficient
importance to shift market psychology for a
considerable time, resulting in a major price
movement. Such gaps are sometimes
"filled", by an early reaction in prices, but
more often than not the stock accelerates in
movement in the direction of the breakout.
The second gap I wish to describe is called
"The Runaway, “or Measuring”, Gap".
Traders prefer to buy on reactions and often
wait for one after a major advance has
gotten underway. Sometimes, however, the
stock, instead of reacting by moving lower,
accelerates its advance. Then the waiting
traders may jump aboard, in fear of missing
the up trend advance. Also, at the same
time, those who have sold short may see a
big rise ahead and rush in to buy stock to
cover their shorts and to reduce their
losses. The move may also stir great
excitement in the general public and entice
them to move into the issue.
A new wave of buying develops from all of
these sources, and it creates one or a
series of aptly names "Runaway Gaps".
These gaps are also referred to as
"Measuring Gaps", because they often
occur at or near the midway point of a major
price swing, and hence can be used to
measure the likely extent of the stocks
movement. For example, if a stock formed a
base at the $20 level and then climbs to
$40, where a Runaway Gap forms, it is a
fair likelihood that the stock will go onto the
area of $60 before stopping or falling.
The third and last gap I wish to discuss is
called the "Exhaustion Gap". As the stock
advance rolls on, more and more
stockholders grow nervous as well as
pleased. They feel that this cannot go on
forever, but they hate to sell out and miss a
good part of the rise. As the stock reaches
it's highs, traders will decide the stock is
over priced and will sell it short, but when
Specialists see this action appear on their
books they raise the stocks price sharply in
the form of the "Exhaustion Gap". This
causes those investors who sold short to
rush into the market place in order to cover
their purchases. A final rush of buying
causes the price to form the Gap. This is
where the Specialist unloads his entire
inventory and sells the stock short. This
short rally will carry the stock into an area
where a good deal of investors decide to
take their profits if they are smart enough to
recognize what is happening. That final
push will culminate in heavy trading, and
the stock would then "Fill the Gap" within a
week or so as it moves to the lows that the
Specialist wants.