The Power Of Gaps
Have you ever
noticed a stock or an index which seemed to be moving effortlessly
in its desired direction suddenly stop dead in its tracks? Have you
ever noticed how this often happens nowhere near a major moving average
or trend line? Do you
sometimes find yourself watching a trade reverse in your
face and not have an explanation as to why this happens?
More often than not, the answer can be
found by identifying areas of gaps on weekly,
daily and intraday charts. In order to determine all potential areas
of support and resistance when you are evaluating a trade (we all have
our targets and stops in
mind before we enter the trade, right? Right?) you must
always consider gap areas.
For clarification, the Japanese refer
to a gap as a “window.” Most of my charting
analysis is based on Japanese candlestick charting theory which was
primarily brought to
prominence in the United States by Steve
Nison. Nison is considered to be the
“Godfather” of Japanese candlestick analysis in the United
States. While Japanese candlestick analysis has really only been practiced
for the past 25 years in the United States (thanks to Steve Nison’s
research and work), the
Far East has been utilizing these principles and theories
for centuries.
There is a Japanese saying, “A
clever hawk hides its claws.” For those of us who
utilize candlesticks, we believe “the claws” of the market to be
hidden within
their message (from Nison, Beyond Candlesticks). Let
us consider the case of Merck and Co.
(
MRK |
Quote |
Chart |
News |
PowerRating). In my Dec. 27, 2000, commentary,
I pointed out the potential of Merck and Co. to fall out of its consolidation
range due to negative divergences with its technicals. I pointed
out potential target areas based on two windows which were formed on
gaps up in October, 2000.
Let’s go back and examine the chart from Dec. 27:
Now let’s take a look at MRK’s present
day chart and summarize what actually transpired
subsequent to my Dec. 27 commentary.
As we can clearly see, MRK fell
violently out of its trading range in early January,
2001. We can see a multiple-day effort to stabilize at the area of
gap #1 (as shown on
chart). However, this gap #1 zone was violated and the zone of gap #2 was
quickly tested. To date, the zone of gap #2 has halted a further
decline in the share price of MRK.
However, it is not certain as to
whether or not MRK can resume its prior uptrend
at this time. This is due to the prior support zone of gap #1 now serving
as resistance during rally attempts. Until this new resistance zone
of gap #1 can be overcome,
MRK appears to be locked in a trading range between
its new resistance area of gap #1 and its support zone of gap #2. A
break through either one
of these zones would suggest continuation in that direction.
Most who were observing the recent
trading activity of Merck and Co. may have been
perplexed by its trading pattern as it seemed to act in total disregard
for major moving averages
and trendlines. The key to having made a profitable
trade in this particular instance was identifying where the market
was “hiding its
claws.” The “claws,” as we have proven here, were hidden
within the gap areas
described above.
For The Best Trading
Books, Video Courses and Software To Improve Your Trading