As revealing as the gaps are for alerting when a major run-up is about to occur, it is even more beneficial to know when the gap is about ready to occur. There are particular patterns that forewarn when a gap is likely to occur. And when they do, it means that a whole new trading area is going to be reached. Having this forewarning permits the investor to be ready to get into the trade at the optimal time and have the funds available to take advantage of the profitable move that it initiates.
Note how the gap up at a level that had not been breached for a couple of months now indicates the buyers not being apprehensive about buying above the past highs. This easily reveals that the price is going to new levels.
Notice the breakout in Figure 25 - DCN, Dana Corp. DCN starts its major run once it broke out of a trading range over the past two months. The gap is the alert. The gap up at this important level is a profitable transaction. In this example, volume had a great increase once the new trading levels were reached. Stochastics stayed up near the overbought range but they do indicate that they are pointing up when this new move starts. The protective stops, placed on a gap up day near the highs, would not have been affected with the price continuing higher.
The Prepaid Legal chart, Figure 26, is a chart that one could anticipate a gap occurring. The best entry level was the confirmed Inverted Hammer pattern with volume dramatically increasing over the next few days. As the price came back up towards the trading area of $22.00, it was feasible that if the price broke that level, it could head much higher. The appearance of the gap should have been an immediate indication that buying was coming into the stock. The long bullish candle would have revealed that the old trading levels were now being disregarded, new buying dynamics were in the stock price.
Figure 26 - Prepaid Legal PPD.
Despite the very small gap in the price rise of Cooper Tire’s stock move, it still indicated strong buying even after a strong up day. The fact that the buying after the gap up took
prices to new highs would have alerted the Candlestick investor that a new level should be reached.
All of the above examples had chart set-ups that would leave room for anticipating that a gap up could occur. All illustrate that when a gap up is noticed, new buying strength is involved, moving prices up to much higher prices.
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