Today we will be discussing about short term patterns. There are of different types: Gaps, Spike, Dead Cat Bounce and Island Reversal. We will cover Gaps and its various types.
Price charts often have blank spaces known as gaps. They represent times when no shares were traded within a particular price range. Normally this occurs between the close of the market on one day and next day’s open. A price gap may or may not have any significance. For an Up gap (bullish pattern) to form, its next session’s low must be higher than the high price of the previous day. For a Down gap (bearish pattern), the next day’s high price must be lower than the low price of the previous day. Here are the different types of Gaps:a) Common Gap
A common gap usually appears in a trading range or congestion area and reinforces the apparent lack of interest in the stock at that time. Many times this is further exacerbated by low trading volume. It is also referred to as a trading gap or an area gap and is usually uneventful. These gaps are common and usually get filled fairly quickly which means that the price action after a few days to a few weeks usually retraces to the last day before the gap. This is also known as closing the gap.
b) Breakaway Gap
Breakaway gaps occur when the price action is breaking out of a trading range or congestion area. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. The area near the top of the congestion area is usually resistance when approached from below. Similarly, the area near the bottom of the congestion area is support when approached from above. To break out of these areas requires market enthusiasm and more buyers than sellers for an upside breakout or more sellers than buyers for a downside breakout.
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