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Gaps are simply areas on the bar chart where no trading has taken place. An upward gap occurs when the lowest price for one day is higher than the highest price of the preceding day. A downward gap means that the highest price for one day is lower than the lowest price of the preceding day. There are different types of marketclub gaps that appear at different stages of the trend. Being able to distinguish among them can provide useful and profitable market insights. Three types of gaps have forecasting value—breakaway, runaway and exhaustion gaps (See Figure 6-1). The breakaway gap usually occurs upon completion of an important price pattern and signals a significant market move. A breakout above the neckline of a head and shoulders bottom, for example, often occurs on a breakaway gap marketclub. The runaway gap usually occurs after the trend is well underway. It often appears about halfway through the move (which is why it is also called a measuring gap since it gives some indication of how much of the move is left.) During uptrends, the breakaway and runaway gaps usually provide support below the market on subsequent market dips; during downtrends, these two gaps act as resistance over the market on bounces. The exhaustion gap occurs right at the end of the market move and represents a last gasp in the trend. Sometimes an exhaustion gap is followed within a few days by a breakaway gap in the other direction, leaving several days of price action isolated by two gaps. This market phenomenon is called the island reversal and usually signals an important market turn. Another price formation is the key reversal day. This minor pattern often warns of an impending change in trend. In an uptrend, prices usually open higher, then break sharply to the downside and close below the previous day’s closing price. (A bottom reversal day opens lower and closes higher.) The wider the day’s range and the heavier the volume, the more significant the warning becomes and the more authority it carries marketclub. Outside reversal days (where the high and low of the current day’s range are both wider than the previous day’s range) are considered more potent. The key reversal day is a relatively minor pattern taken on its own merits, but can assume major importance if other technical factors suggest that an important change in trend is imminent (See Figure 7-1). Market trends seldom take place in straight lines. Most trend pictures show a series of zig-zags with several corrections against the existing trend. These corrections usually fall into certain predictable percentage parameters. The best-known example marketclub of this is the fifty-percent retracement. That is to say, a secondary, or intermediate, correction against a major uptrend often retraces about half of the prior uptrend before the bull trend is again resumed. Bear market bounces often recover about half of the prior downtrend. A minimum retracement is usually about a third of the prior trend. The two-thirds point is considered the maximum retracement that is allowed if the prior trend is going to resume. A retracement beyond the two-thirds point usually warns of a marketclub trend reversal in progress. Chartists also place importance on retracements of 38% and 62% which are called Fibonacci retracements.
 

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