A gap that occurs well after the beginning of a trend reversal, where stochastics are still in the midrange of an uptrend, has different implications. How do you distinguish whether a gap is a potential measuring gap? Evaluate where the stochastics are in the trend. If they are still relatively low, the trend has more room to create another gap before getting to the overbought area. Note in the CTX chart, Figure 9 - Centex, how the trend started with a small gap up. The next few days, another gap forms, in the midrange of this trend. The bears could not push prices back down through that gap over the next few days.
Figure 9 – Centex
Eventually the bulls gapped up the price again. Notice that the beginning of the trend up to the first gap [B] is about the same price movement as the move after the second gap to the top of the trend [A]. This simple measurement gives the gaps their name. The telling ingredient is the fact that the bears could not push prices back down through the first measuring gap. That factor gives the bulls renewed confidence and they step back in. The next day they gap it up again due to not being afraid of the bear camp.
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