V.8:6 (225-227): Are there gaps in your thinking? by Richard W. Arms Jr.

Are there gaps in your thinking? by Richard W. Arms Jr.

Usually in the use of technical analysis we are concerned with what happened and how it happened in order to predict what will happen. But there are times when what didn't happen can be as important as what did happen. Consider the stock that looked ready to break out into new high ground: It approached the old highs and then died. The fact that it refused to go above the old resistance was a very important non-message. Then there was the stock that was expected to find support at the same level that it had held three times before, but instead, volume got heavier and the price dropped below the old trading range decisively. Again, what didn't happen was very important and may have been signaling an opportunity to make money with a short position.

One of the most important non-events in any market is a gap — an area in which a stock did not trade. If there are no gaps in your thinking you may be ignoring a very profitable opportunity! This, of course, calls for a thorough understanding of gaps and how they come into play. A gap occurs when a stock or commodity skips a series of prices from one day to the next, leaving a price range in which the stock was not traded. The move that produces the gap can be either up or down. The assumption is that something happened during the time the market was closed that affected public thinking to the extent that the stock was revalued.