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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