Profitable Gaps And Meaningless Gaps
Excessive buying or
selling pressure causes gaps, and gaps can provide you with important
information on the strength and weakness of stocks. Some gaps signal potential
reversals of the dominant trend, while other gaps confirm a continuation of the
current trend. Breakaway gaps and exhaustion gaps are examples of reversal
signals, and continuation gaps, obviously, confirm a continuation of the current
trend. Identifying each gap correctly is extremely important because often a
significant move follows after a gap. Needless to say, gaps can give us great
profitable trading opportunities.
TriQuint Semiconductor (TQNT)
is an excellent example of a breakaway gap. On April 18, the stock gapped open
above its 50-day moving average and ended its downtrend. Look how strong volume
was. Since the gap, TQNT has gained almost 50%.
Skechers USA Inc (SKX)
is an example of a continuation gap. Again, you must see heavy volume to confirm
the validity of the gap.
Finally, remember that certain stocks, such as foreign companies and illiquid
stocks, tend to get gaps almost every day. Don’t be fooled by them. Don’t read
into them too much. Sony (SNE)
is a good example of a stock with too many meaningless gaps. See what I mean?
Till Tuesday,