More often than not, the answer can be found by identifying areas of gaps on weekly, daily and intraday charts.. In order to determine all potential areas of support and resistance when
Trang 1The Power Of Gaps
By Goran Yordanoff
Have you ever noticed a stock or an index, which seemed to be moving effortlessly in its desired direction, suddenly stop dead in its tracks? Have you ever noticed how this often happens nowhere near a major moving average or trend line? Do you sometimes find yourself watching a trade reverse in your face and not have an explanation as to why this happens?
More often than not, the answer can be found by identifying areas of gaps on weekly, daily and intraday charts In order to determine all potential areas of support and resistance when you are evaluating a trade (we all have our targets
and stops in mind before we enter the trade, right? Right?) you must always
consider gap areas
For clarification, the Japanese refer to a gap as a "window." Most of my charting analysis is based on Japanese candlestick charting theory which was primarily brought to prominence in the United States by Steve Nison Nison is considered
to be the "Godfather" of Japanese candlestick analysis in the United States While Japanese candlestick analysis has really only been practiced for the past
25 years in the United States (thanks to Steve Nison's research and work), the Far East has been utilizing these principles and theories for centuries
There is a Japanese saying, "A clever hawk hides its claws." For those of us who utilize candlesticks, we believe "the claws" of the market to be hidden within their
message (from Nison, Beyond Candlesticks) Let us consider the case of Merck
and Co (MRK) In my Dec 27, 2000, commentary, I pointed out the potential of Merck and Co to fall out of its consolidation range due to negative divergences with its technicals I pointed out potential target areas based on two windows which were formed on gaps up in October, 2000 Let's go back and examine the chart from Dec 27:
Trang 2Now let's take a look at MRK's present day chart and summarize what actually transpired subsequent to my Dec 27 commentary
Trang 3As we can clearly see, MRK fell violently out of its trading range in early January,
2001 We can see a multiple-day effort to stabilize at the area of gap #1 (as shown on chart) However, this gap #1 zone was violated and the zone of gap #2 was quickly tested To date, the zone of gap #2 has halted a further decline in the share price of MRK
However, it is not certain as to whether or not MRK can resume its prior uptrend
at this time This is due to the prior support zone of gap #1 now serving as resistance during rally attempts Until this new resistance zone of gap #1 can be overcome, MRK appears to be locked in a trading range between its new
resistance area of gap #1 and its support zone of gap #2 A break through either one of these zones would suggest continuation in that direction
Most who were observing the recent trading activity of Merck and Co may have been perplexed by its trading pattern as it seemed to act in total disregard for major moving averages and trendlines The key to having made a profitable trade
in this particular instance was identifying where the market was "hiding its claws." The "claws," as we have proven here, were hidden within the gap areas
described above
Copyright © 2001 by TradingMarkets.com, Inc