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
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.