gaps and gaps in the bag

Technical analysis of gaps or gaps in the stock market

I would like to give my opinion about the gaps, I have read hundreds of versions about the operation with gaps, how to take advantage of them, and the truth is that none convinced me at all, I present the main thing where all the analysts agree and then my point of view more practical about how to take advantage of them as much as possible, it is a method that I develop with practice, so in the long term it is a successful point of view and this is where everyone fails, not all the gaps are closed as most or all say continue with the trend after this, we will see why in my opinion.

-The gaps are areas in the charts that are left empty when operations are not crossed at certain trading levels. From a technical point of view there are gaps (also called 'gaps') that have no technical significance, such as those generated by dividends or increases, which must be corrected for the graph to remain valid.

Gaps to the upside give us signs of market strength and gaps to the downside are signs of weakness. They will generally act as support and resistance levels depending on whether the gap is to the upside (support) or to the downside (resistance).

A gap in a weekly or monthly chart will be much more significant and reliable in determining main trends or breaks in them.

Formerly it was said that prices always return to 'fill in' the gap, that is, if there has been a gap, prices tend to return to this band. This is not true, many gaps are never filled. The technical analyst must know how to identify what type of gap occurs and knowing at what point in the movement it occurs.

We are going to classify the different types of holes below.

Exhaust gap:

It occurs with a market breakdown, in the first movements of a trend. They usually occur at the end of a figure, normally the overcoming of a resistance can occur with a gap in prices. A gap of this type gives reliability to the exhaust produced since normally the gaps act in favor of the trend.

If the break comes accompanied by volume it is a very reliable signal.

This gap is not usually filled and when it does, only part of it is filled. If the gap is filled it may be a false break gap, it would become a common gap.

Intermediate gap or continuation gap:

After the breakout gap, the price again leaves gaps in the same direction (one or more successive ones) with a lower volume than in the breakout gap. These gaps give strength and reliability to the new direction that the market has taken, and at the same time they will act as reference levels, becoming support or resistance depending on the trend in which the gaps occur: if the gaps are up, they will be levels. of support for future corrections, and if the gaps are in a downtrend, they will become future resistance zones in the face of an upward turn in price.

If at some point the price falls below the gap, we could be facing a market turnaround so we must be alert.

This gap occurs in the middle of the trend, which must have a fairly steep slope.

Depletion gap:

They are gaps that occur at the end of a market movement in which we have seen breakout and continuation gaps. After a short period of time (usually a few days) the gap is filled and the price falls below. This signal tells us that the gap was exhausted and there will probably be a turn in the opposite direction from which we came.

Click on the graphic to enlarge

Common gap: It is the one that occurs in low liquid values and also occurs in congestion areas or lateral sections with little volume, they are formed by lack of interest. This type of Gap has no technical significance, it tells us nothing.

Escape gaps and continuation gaps must be given with trading volume. As a general rule, they must exceed the volume's 60-session moving average and always give us an indication that the current movement is strong.

A depletion gap will usually be given to us with an extreme reading of the oscillators or possibly in a price target zone when the current tranche has come to an end. Obviously, these types of gaps are always filled.

My opinion:

So far we generally agree, now I will explain a simpler way to understand the gaps, looking at the graph and understanding why in this situation we will find the key, we have to look mainly at the series, at the price, that is, the candles that have formed before each gap and its trend.

How do they work?
-A hole can function as support and resistance.
-The gaps are closed intraday.

How to take advantage of them?

Once the basics have been analyzed we have to understand and realize that there are two important things in the holes and this is the key to operate well using holes,

1º) A gap that is formed in the same trend means that they are last minute purchases or sales by newbies, the professional investor will close the gap and even change the trend.
2nd) A gap that forms in the opposite trend means early purchases or sales made by professionals, The professional investor will change the trend with his gap against the trend or wait for the novices to close the gap to attack again with the opposite trend.
*** Therefore we can differentiate the purchases / sales made by newbies and those made by professionals, where we will achieve much more effectiveness by following professionals.

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