Specials Use of Gaps on Charts

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Specialist Use Of Gaps On Charts

One of the most important things toremember in charting is the specialists’ useof “

Gaps

”. Whenever you see a Gap on achart, use it to draw

your 15, 30, 45, or 60-degree lines from or through that point. Inan up trend move it can indicate a supportline for a short term decline once the stockhas peaked or it can signal a resistance linethat the stock will meet every time itdeclines and then tries to rally back. It alsoindicates where the next 45, 60 degree uptrend resistance channel lines will be. Everytime the stock reaches that up trend angle itwill begin another move lower, and the highwill also be confined by high volume and bigblock activity.The three gaps that I am going to cover follow each other in succession once thestock breaks out of a charting formation.The first of these gaps is called "

TheBreakaway Gap

". It generally occurs after an important chart pattern has beencompleted, and it often marks the beginningof a major price move either up or down. An"

upward

" breakaway gap is usuallyaccompanied by a big rise in volume, and islikely to show a greater than normal rangebetween the day's high and low prices, inother words a much longer vertical line onthe chart.The breakaway usually represents somemajor development has caused aconcentration of orders to buy or sell on thespecialist book at the market price. Thedevelopment often is an unexpected newsevent, a stock split, dividend action, amerger, better than or worse than expectedearnings, or something of sufficientimportance to shift market psychology for aconsiderable time, resulting in a major pricemovement. Such gaps are sometimes"

filled

", by an early reaction in prices, butmore often than not the stock accelerates inmovement 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 oftenwait for one after a major advance hasgotten underway. Sometimes, however, thestock, instead of reacting by moving lower,accelerates its advance. Then the waitingtraders may jump aboard, in fear of missingthe up trend advance. Also, at the sametime, those who have sold short may see abig rise ahead and rush in to buy stock tocover their shorts and to reduce their losses. The move may also stir greatexcitement in the general public and enticethem to move into the issue.A new wave of buying develops from all of these sources, and it creates one or aseries of aptly names "

Runaway Gaps

".These gaps are also referred to as"

Measuring Gaps

", because they oftenoccur at or near the midway point of a major price swing, and hence can be used tomeasure the likely extent of the stocksmovement. For example, if a stock formed abase at the $20 level and then climbs to$40, where a Runaway Gap forms, it is afair likelihood that the stock will go onto thearea of $60 before stopping or falling.The third and last gap I wish to discuss iscalled the "

Exhaustion Gap

". As the stockadvance rolls on, more and morestockholders grow nervous as well aspleased. They feel that this cannot go onforever, but they hate to sell out and miss agood part of the rise. As the stock reachesit's highs, traders will decide the stock isover priced and will sell it short, but whenSpecialists see this action appear on their books they raise the stocks price sharply inthe form of the "

Exhaustion Gap

". Thiscauses those investors who sold short to

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