A few weeks back we discussed the nature of gaps and how they can be signs of strength or weakness in a market.
We looked at the stock ASX after huge "gap up" in the price action after the takeover speculation from the Singapore exchange. Those having bought into this stock on this news may be well questioning this decision in the short term as the market has come back somewhat and is now holding within the gap created on the 25 Oct 2010.
In the chart below you can see the recent activity.
Chart 1 - ASX Daily Bar Chart
The good news for those in the bullish camp is that the gap created has not been closed and that this stock may head sideways and gain some momentum to the upside.
Mind the gap
I would add that this is typical of takeover generated news items, often after the initial price volatility the individual stock can travel sideways until the news item has been updated or resolved (for example confirmation of the merger being approved or declined).
We can watch and interpret gaps on any market we choose that we can chart. Stocks tend to be involved with gaps on somewhat of a regular basis. You can see those more regularly on some of the commodities markets, in particular the metals, energies and soft commodities have all been interesting to watch gaps on.
If you are looking to hone your skills in gapping markets as a practice before you tackle them for real, look no further than BHP or RIO as they are heavily influenced by their dual listings and the movement of commodities.
Applying gaps
We can also apply gaps to the index markets like the ASX 200, or in the case of a derivates market over the ASX 200 we can use the SPI200 futures. In chart two you can see the price action of the SPI futures and how the gaps have come in over the last few days. For those in the know this chart is tracking the day only prices on the SPI200, the 24-hour chart does not have these gaps.
Chart 2 - SPI200 Daily Bar Chart
The gap on the index was influenced by the QE2 announcement and the following jump up on Wall St. These gaps currently show strength in the market as Monday's price action attempted to head lower into the gap but was meant with support and closed higher. If this gap remains, you could expect higher prices from here on this market.
A weaker market
However, just as quickly a retest of this gap will attract the bulls to show their true spirit, and if they have the gumption to keep buying. As a technical trader a strong close of this gap would signal a weaker market. With all forms of analysis nothing is stand alone, so a layering approach is important.
I will certainly be watching this gap as a guide to where this market will be in the short term.
Good Trading.
