Gaps in price at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Breakaway Gap

A Breakaway Gap is a breakout of a trading range or pattern where the price begins trading above or below the previous range and days price. When the opening price is much different than the previous days closing price a gap forms. The movement indicates a higher enthusiasm to buy or sell the stock depending on the direction of the gap. Traders should realize that a higher enthusiasm to buy or sell any security which occurs suddenly so that a gap in price activity materializes should be scrutinized for the possibility of whipsaws.

The motivated movement in price may last for some time or it may be a single day anomalous reaction to news or event. Traders may see opposing fundamentals emerging for the stock or market in the days following a gap and will use this information to support possible price projections in the event that a reversal of the price trend occurs. Gaps are often closed by future prices if fundamentals support a different outlook. Depending on the degree of enthusiasm and the position of the gap, traders will make price projections to be used if price and volume activity begins to support their outlook. In the event of a reversal of price trend after the formation of a gap, traders often look for prices to close the gap before moving significantly forward.

Alternatively if price begins to consolidate but does not close the gap, it becomes supporting evidence for a continuation of price trend in the direction of the Gap.

In the case of a gap to the upside, where initial enthusiasm results in an opening price far above the previous days closing price, there are arguments for and against trading strategies based on this occurrence. Some traders look for small gains intra-day on the day on which the gap occurred, and then either closing or minimizing the position by the close of the day.

For downside gaps, some strategies call for intra-day trading in the direction of the gapping security while others interpret a gap as a warning signal of diminished demand and implement a trading decision based on that occurrence.

Trade strategies that involve the occurrence of a gap in price action can be risky due to the high potential for a whipsaw or reversal. Other confirming indicators and data should accompany any trading decision when gaps are involved.

For longer trade horizons, gaps can have many different implications and could provide very poor trading results if the security later looses momentum and reverses the trend. A gap in itself is an instance of increased demand or supply that needs to be fully understood prior to becoming a tradable event.

Several gaps in the price plot of the S&P500 Index are the result of strong overnight bias leading into the trading day that results in an opening price that differs from the closing price the day before. When a gap is the result of a breakout from a channel or trading range, as if it is the result of an event or perception of an event that significantly alters supply and demand, it can predict a continuation of that movement.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation