Stocks & Commodities V. 22:12 (99-100): Charting The Market by David Penn
Are gaps to technical analysts what stock splits are to fundamental analysts: clear evidence of a market event, the significance of which is often inversely related to the
level of glad surprise the event itself elicits? Thus, during the stock market bubble years of the late 1990s, television advertisements for brokerage firms would routinely feature “regular” guy (and gal) traders and investors babbling about how XYZ Trade Inc. kept them abreast of all the things a “serious trader/investor” needs: upgrades, downgrades, stock splits. … In fact, a number of brokerages continue to present us with these alleged market players, who are apparently unable to execute a trade unless an analyst suggests they do so.
But technicians were often little better, as the birthright of stock market riches was claimed more and more often by an ever-widening cohort of stock traders and investors. And one of the favorite tools of the bubble-era technical analyst was the gap — particularly the gap up. In a time when many of the most sought-after stocks
were also the least-liquid stocks (especially as the Nasdaq market soared into its peak), the gap up appeared to become both more common and, potentially, more rewarding.
What exactly is meant by a gap? And do the different kinds of gaps — from ex-dividend and common gaps to breakaway and exhaustion gaps — suggest different things in terms of how the astute technical analyst reads them?