ANALYZING CHART PATTERNS: GAPS (contd)
Exhaustion Gap
This is the last gap that forms at the end of a trend
and is a negative sign that the trend is about to reverse. This usually occurs
at the last thrusts of a trend (typically marked with panic or hype), but can
also be the point when weaker market participants start to move in or out of
the security.
The exhaustion gap usually coincides with an irrational
market philosophy, such as the security being touted as "a can't-miss
opportunity" or conversely as something to "avoid at all costs".
Exhaustion gap
To identify this as an exhaustion gap or the last large
move in the trend, the gap should be marked with a large amount of volume. The
strength of this signal is also increased when it occurs after the security has
already made a substantial move.
Because the exhaustion gap signals a trend reversal, the
gap is expected to fill. After the exhaustion gap, the price will often move
sideways before eventually moving against the prior trend. Once the price fills
the gap, the pattern is considered to be complete and signals that the trend
will reverse.
Island Reversal
One of the most well-known gap patterns is the island
reversal, which is formed by a gap followed by flat trading and then confirmed
by another gap in the opposite direction. This pattern is a strong signal of a
top or bottom in a trend, indicating a coming shift in the trend.
Above is an example of an island-bottom reversal that
occurs at the end of a downtrend. It's formed when an exhaustion gap appears in
a downtrend followed by a period of flat trading. The pattern is confirmed when
an upward breakaway gap forms in the price pattern.
The size of the trend reversal or the quality of the signal
is dependent on the location of the island in the prior trend. If it happens
near the beginning of a trend, then the size of the reversal will likely be
less significant.
No comments:
Post a Comment