Gap days - When the gap gets closed

[brettc4]

Hi all,

ASL had a rather bad day, but the chart now shows something I have read a little about but not much, and that is the Gap days are general covered by price action in the future.



I haven't however read what will usually occur after the gap has been covered, does anyone out there trade gaps, and if so, what is a likely outcome from now.

Thanks, Brett

 

[tech/a]

Gaps generally act as support.

In this case price action has just belted through the gap on pretty high volume.

This is looking weak.

 

[Chorlton]

The close was off the low though which could suggest some support / buying coming in at this lower level.

The current low also coincides with (i) the closing of the previous gap and (ii) the previous resistance between Feb and May which could now act as support.

Others opinions???

Chorlton

 

[nizar]

Gaps generally act as support.

In this case price action has just belted through the gap on pretty high volume.

This is looking weak.

I agree with the above.

 

[RichKid]

Gaps generally act as support.

In this case price action has just belted through the gap on pretty high volume.

This is looking weak.

Hi tech

I thought the opposite was true- gaps usually get filled??? Wonder if anyone has stats on this or if it is possible to code it to test?

As for trading them (long) methodically, some rules might be useful- if the gap isn't filled in a week then it is considered support .....or if the first test of the gap's upper boundary holds then the gap should be considered support (and the stop for a long entry should be below the low of that test bar or the lower end of the gap)?

Just some thoughts, nice topic, been interested in price gaps for awhile now.

 

[Chorlton]

Wonder if anyone has stats on this .

According to Bulkowski (Encyclopedia of Chart Patterns):

UPward Breakout Gaps

Close within a week: Bull Mkt Bear Mkt

Area/Common Gap 89% 93%
Breakaway 2% 9%
Continuation 4% 20%
Exhaustion 61% 78%



DOWNward Breakout Gaps

Close within a week: Bull Mkt Bear Mkt

Area/Common Gap 92% 89%
Breakaway 1% 1%
Continuation 9% 13%
Exhaustion 64% 63%



Chorlton

 

[kerosam]

so if i see a gap, i would wait for the share price to settle down before buying in?

i did hear from a speaker that gaps wil always be filled. When will the gap fill, i don't know. Didn't ask... some of the earlier post mentions 1 week.

since i'm learning a bit more on shorting, could this be a signal to look for shorting opportunity especially when it gap upwards, since the sp will return for the gap?

 

[Chorlton]

so if i see a gap, i would wait for the share price to settle down before buying in?

i did hear from a speaker that gaps wil always be filled. When will the gap fill, i don't know. Didn't ask... some of the earlier post mentions 1 week.

since i'm learning a bit more on shorting, could this be a signal to look for shorting opportunity especially when it gap upwards, since the sp will return for the gap?

Unfortunately, its not that simple IMO. Some gaps do not get filled such as runaway gaps.

FWI... I would look at the volume on the day of the gap to offer some clues as to whether it would get filled or not. For example, a gap up on very low relative volume would suggest no demand and the likelihood of the price reversing and filling the gap.

 

[It's Snake Pliskin]

Hi tech

I thought the opposite was true- gaps usually get filled??? Wonder if anyone has stats on this or if it is possible to code it to test?

As for trading them (long) methodically, some rules might be useful- if the gap isn't filled in a week then it is considered support .....or if the first test of the gap's upper boundary holds then the gap should be considered support (and the stop for a long entry should be below the low of that test bar or the lower end of the gap)?

Just some thoughts, nice topic, been interested in price gaps for awhile now.

Hi richkid,

Nice to see you posting again.

Gaps have many MYTHS that people like to talk about. One is: "gaps fill". Not true as a stand alone comment. But yes sometimes they act as support / resistance, and sometimes they are ignored. So the powerful message is what type of gap is it? Answering that with some knowledge of the chart being watched will reveal many answers.

Snake

 

[Porper]

The close was off the low though which could suggest some support / buying coming in at this lower level.

The current low also coincides with (i) the closing of the previous gap and (ii) the previous resistance between Feb and May which could now act as support.

Others opinions???

Chorlton

On the weekly it looks like we have just completed a wave 5.So we could have just had the wave A, or wave 3 of wave A, either way we should have a bounce away from this gap and then continue down.

Certainly not bullish from here though.

There are definitely buyers around to close well off the lows with good volume, but to trade it you would have to be quick i.m.o.

The XJO should get a pounding today so all short term patterns don't mean too much to me at the moment.

 

[Edwood]

morning Brett - one way you could look at gap fills is to go for a % of the gap filling, not the entire gap. I posted a couple of links on the SPI thread last night showing a gap analysis done on S&P and a link to CBOT for gap strategies written by a guy called John Carter - bit of waffle at the start of the Carter article but worth reading the lot.

Basically if you go for say 38% or 50% fill your hit rate will increase a lot.

but as Snake says each gap needs to be treated differently as it depends where the gap occurs relative to the overall action (breakaway, common, exhaustion). Common & exhaustion are more likely to be filled. Exhaustion are best imo, lowest risk

 

[Nick Radge]

I have traded gaps since the mid-90's and have come across various gaps that can be traded and those that are more technical in nature. This chart shows both kinds. Yesterdays selloff has now tested gap support. The close off the lows on high volume suggests the brakes are being applied here and this takes on extra importance when aligned with the gap support plus the Head & Shoulders target. Prior to that large gap we saw an increase in volume. Those buyers would more than likely still be interested in buying at these levels, so any further evidence of demand at or near these levels could start building a bullish case. More volume info needed though.

I cover gap trading in my course.

This post may contain advice that has been prepared by Reef Capital Coaching ABN 24 092 309 978 (“RCC”) and is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

 

[Edwood]

hi Nick - I note that a % of the first gap was filled (not clear what it is, looks btwn 23% & 38%) - why do you classify that one as not being a trading gap? the spike up to create the gap sold off from the high of day - personally given the size of the gap & the sell down on the day I'd look to short that with stop above the HOD. any thoughts? either way it supports the 'partial / % gap fill' strategy as being higher probability that 100% fill

I can see lots of reasons why you have the other one as a trading gap, but mostly due to the overall action - i.e., lower high printed, breakdown off the trend line under the lows - then gapping down which it came back to fill so it looked like it 'wanted' to go lower by satisfying all prices at that level.

 

[Nick Radge]

Its a function of risk and reward. Where would you place your stop on the larger gap? and where would that sit within a realistic follow through?

 

[Edwood]

well its all a bit hindsight but on an SPI open like that - around 17% gap up! - imo you'd have to short from near the open looking for the fade. but given that these are daily bars and its a stock I guess I'd put my stop above the failed retest then look for the fade out below.

your second gap - I'd actually be more inclined to take the lower high & break of trend line as the signal, not the gap - but if you're saying they're frequent in situations like that I'll definitely watch out for them

feel free to highlight any howlers!

 

[Nick Radge]

Look at ANZ 2-days ago...

 

[RichKid]

Thanks Snake, nice to discuss trading whenever possible, I need to study this propensity of prices to discover and fill gaps (at some stage) in detail later....I try to label gaps as I see them on charts for practise. Here's a quick glossary of different types of gaps, starting with a runaway gap: http://www.investopedia.com/terms/r/runawaygap.asp and some other types: http://www.incrediblecharts.com/technical/gaps.htm

Sometimes people use different names for the same type of gap. If anyone wants to practise please feel free to label charts with your observations in relation to this thread topic, as Nick has done above.

As an exercise, compare WOW or CBA with BHP or NEM.

 

[gvanto]

Hey Chorlton,

I was wondering if you would mind clarifying what you meant with "Area/Common" gaps ?

And the breakaway and continuation?

(Re: your post on the 9th Aug 2007)

Cheerio
Gert

 

[gvanto]

ah ok just noticed its nicely explained on the incrediblecharts.com link

NIce one!