F. GAPS

“The foolish person seeks happiness in the distance, the wise person grows it under his feet.”

** GAPS **

A gap is a "hole" in the chart -- a space or a vacuum that is empty, at least temporarily, of price action. There are four types of gaps: common, breakaway, runaway, and exhaustion.

Gaps are simply areas on the bar chart where no trading has taken place.An upward gap occurs when the lowest price for one day is higher than the highest price of the preceding day. A downward gap means that the highest price for one day is lower than the lowest price of the preceding day. There are some reasons why a gap may appear in the graph of an individual stock. One of the most common causes of a gap is an earnings release that is above or below Wall Street's expectations. Other causes of gaps include an analyst upgrade or downgrade, a merger announcement, or the release of a significant news item. A large gap implies a temporary supply/demand imbalance. The larger the gap, the more extreme the imbalance. A downside price gap of several dollars -- particularly on high volume -- reflects urgent selling. On the other hand, an upside price gap of several dollars on high volume represents intense buying. This sense of urgency is seldom played out in a single trading session.

The breakaway gap usually occurs upon completion of an important price pattern and signals a significant market move. A breakout above the neckline of a head and shoulders bottom, for example, often occurs on a breakaway gap. The runaway gap usually occurs after the trend is well underway. It often appears about halfway through the move (which is why it is also called a measuring gap since it gives some indication of how much of the move is left.) During uptrends,the breakaway and runaway gaps usually provide support below the market on subsequent market dips; during downtrends, these two gaps act as resistance over the market on bounces.

The exhaustion gap occurs right at the end of the market move and represents a last gasp in the trend. Sometimes an exhaustion gap is followed within a few days by a breakaway gap in the other direction, leaving several days of price action isolated by two gaps. This market phenomenon is called the island reversal and usually signals an important market turn.