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Stock Analysis for Trading Gaps

Stock Analysis for Trading Gaps at the Bottom and Top of a Trend

Gaps have powerful implications and provide very profitable trading opportunities. Anyone can easily learn and quickly master stock analysis for trading gaps. The unique built-in forces encompassed in the Japanese candlestick signals, and the strength of a move revealed by the existence of a gap produce powerful trade factors.

Once you understand why a gap occurs at different points in a trend, taking advantage of what the gap reveals becomes highly profitable. In this article, I provide several examples of stock analysis for trading various Gaps.

Stock Analysis for Trading Gaps at the Bottom
All gaps represent extreme enthusiasm for getting into (or out of) a stock position, so much enthusiasm that the stock price actually gaps. Seeing a Gap at the bottom of an established downtrend is a great buying opportunity.  In candlestick analysis, we want to be buying stocks that are already oversold, to reduce the downside risk. What could be better evidence than a gap at the bottom?

Stock analysis for trading gaps, tells us that upon witnessing a gap up at the bottom, further gap analysis is based upon the next periodís candlestick formation. For example, an individual signal such as the dark candle in the above stock chart after the gap up has less relevance. When a large gap occurs, it is not unusual to see immediate selling as the traders take their quick profits. The overall message is that the Bulls on in strong. The next few days demonstrated that the price was not going to back off, the new trend had started.

This pattern formation provides trading opportunities for day trading, swing-trading, and even long-term trading.  That is the beauty of candlestick patterns; they trade the same in all time periods.

Stock analysis for trading gaps tells us also that many investors are afraid to buy after a gap. Their rationale being that they donít like paying for a stock that may have already moved 3% or more in one time period. However, a gap at the bottom of a trend may just be in the beginning of a 25% move or a major trend that can last for a long time.

Stock Analysis for trading Gaps at the Top
Gaps appearing at the top of a trend provides another highly profitable trading opportunity. Remember the mental state of most stock investors, the enthusiasm builds as the trend continues over a period of time. Each day as the price continues to go up, the more convinced investors become that this is the stock that will go to the moon. Their exuberance to get into the stock at any price creates the gap at the top.

What is the correct stock analysis for trading Gaps at the top? Unfortunately, it is often that the price has peaked. However, the candlestick investor can use their knowledge to watch for the different possible outcomes. Go long on the stock, but with an exit strategy to capture a good portion of the price move at the top. A hanging man signal after the gap may produce a good short position (see shorting stocks) all the way down to filling the gap.

In any event, one must be nimble playing gaps and be well trained at how to play each gap variety. Continue to study stock analysis for trading gaps at the top and bottom of the trend.

Market Direction: When the market takes a turn, what is the reaction of most investors? "Oh, I hope the markets come right back up". Why does this reaction occur? Because most investors have gotten into a mindset of the previous trend. The uptrend creates a more relaxed mode. It gives investors time to think about where their prices might move to. When the market takes a downturn, all of a sudden their hopes and expectations of where the prices of their positions should move to get bashed. Their thought process is not incorporating what the market is revealing, it is "what should I do"?

Candlestick analysis eliminates the 'deer in the headlights' syndrome. Candlestick investors have the visual capability of analyzing immediately what is occurring in investor sentiment. The series of Doji's over the past two weeks provided valuable information. The market was in a stage of indecision. It becomes a very simple assessment of what to do after the indecisive time period. The market would tell what investor sentiment has decided. Upon seeing the weakness this past Monday, in the premarket futures, it became obvious which direction investor sentiment was moving the market once more. There had been previous days where the market has sold off through the T. line and then came back to the top end of the trading range for the day. However, in most of those trading days, the selling occurred during the day and not right on the open. The information built into candlestick signals allows an investor to be immediately prepared for the next price move.

The Dow showed some strength today, it's set up for a potential morning star type signal. This produces information that helps make a better assessment of what the market trend is going to be doing. It obviously reveals there is not a mass exodus from the markets. As seen in this uptrend over the past few months, the market has pulled back mildly before resuming its slow uptrend. That could be the case right now. How does an investor play this type of market? The benefit of candlestick signals is the identification of bullish or bearish sentiment coming into a trading entity. If the market in general is continuing its sideways movement, the investment strategy has to be come more concentrated on the very strong bullish charts and bearish charts. These type of market conditions allow for making money in both directions.


A sideways moving market has a logical benefit. It reveals that money is not leaving the market nor is money coming into the market. The funds are merely shifting from sector to sector. If that is the case, use the candlestick signals to your benefit. Identify which sectors are showing the influx of funds and which sectors are being sold. Generally the markets do not move dramatically during the summertime. This makes it logical that many investors take time off and get their vacations in. This is basically the chicken and egg syndrome. But for the investors that want to continue to make money during the summer months, the simple scanning techniques produced by candlestick analysis makes profits still really easy to produce. There will be plenty of sector rotation in a dull sideways market.

Candlestick analysis produces a very important factor for investors. It allows an investor to be prepared and develop a game plan. This dramatically reduces the element of emotional decision-making. Most bad decisions about investing are made with an emotional backdrop. That is why most investors panic sell at the bottom and exuberantly buy at the top. Making the proper investment decision at the appropriate time is very important for maintaining good profits. It also reduces the time spent trying to figure out what to do with a position after it has moved past the decision area. The deer-in-headlights syndrome usually put people into a situation that is much more difficult to decide what to do. For example, when a sell signal is initially confirmed, that is the correct time to take profits. The further that decision is delayed, the more apt an investor gets concerned about selling near the bottom. They hold on to the position well past when they should have taken profits.


As illustrated in the CSIQ chart, a series of Doji's represent indecision. Witnessing the gap down in price after that indecisive period clearly illustrates one simple fact, the sellers want out of this position. Will the T. line active support? Do not know when the selling confirmation appears, but why take the risk? It can always be brought back if it is showing signs of supporting at that level. The fear of selling too early is dramatically reduced when utilizing a confirmed sell signal. The basis for identifying a sell signal is the historic results that signal formation has produced. The appearance of a sell signal, with confirmation, produces a high probability situation for taking profits. Understanding those probabilities keeps an investor from emotionally delaying buying and selling at the appropriate times.

Candlestick Forum Online Training session scheduled for June 20 and 21st has been postponed until approximately mid-July due to extenuating circumstances.

The rescheduled date will be posted as soon as possible. If you would like to sign up for the mid-July session, we will send you the video of the previous session so you can be preparing yourself. This may allow for faster and more clear understanding during the live session. Click here for more information.

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Good investing,

The Candlestick Forum Team

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