By: Tom Gentile
on September 16th, 2022
The major indexes continued their downward slide today.
The question posed to many investment pros on a major financial news network is will the market simply end up finding a place to stop the slide and bounce or do more and trade higher OR will it need to retest the recent lows?
Today’s price action saw a gap down, a bit of a run lower and then it reverses to the upside. The day close near its highs of the day. The day itself is a bullish day, but it is still just a bullish day in an overall yearly downtrend.
Types of Gaps
There are three primary types of gaps. First a gap (the yellow bullet point 1 in the chart image below) is caused by the price of a security open at a different price from its closing price the prior day. It can be a bullish or bearish gap, depending on if the price gapped away higher than the prior day’s close or lower than it.
A Breakaway Gap occurs when a security sees a breakout of a trading range or pattern where the price begins the trading day above or below the previous days price and range.
A Continuation Gap (the yellow bullet point 2 in the chart image below) occurs somewhere in the middle of a trend or price pattern. It indicates there are a bunch of buyers or sellers of the security that believe in the pending future direction of that security.
Continuation gaps are also known as runaway gaps and one of the characteristics of it being a continutation gap is the price of the security trades to where ti broke away from (called ‘filling the gap’) and then resumes its existing trend.
The third type of gap to highlight and educate everyone on is what’s called an Exhaustion Gap (the yellow bullet point 3 in the chart image below).
An Exhaustion Gap ,arks the end of a trend. It acts as a trend reversal signal, meaning the gap reveals traders have exhausted themselves (buyers oi sellers) and the security may now reverse its trend.
A key characteristic for an Exhaustion Gap is for it to be accompanied on higher than normal or large volume.
The Exhaustion Gap can happen and it still take awhile for the stock to actually reveres. One may see theprice bounce a bit and the gap be filled, which could make for a double bottom priuce support or restistance (depending on if it si a bullish or bearish exhaution gap).
Take a look at the chart image of the SPY. The annotations show three yellow bullet points on the chart which may be the three types of gaps that happened on SPY.
The only things that may quell the notion of today being an Exhaustion Gap is the volume isn’t quite there.
We have to see what transpires form here, but things seem like they will at least stall a bit before either resuming the downtrend or reversing.
App: Toms Option Tools
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