I often mention gaps in price movement but have never done an example post … until now. In my 9-28-16 blog post Beast Mode I wrote about the consolidation occurring in ACIA stock. As is always the case with consolidations there are only two eventual outcomes, one bullish and the other bearish. I wrote
The stakes and return on this investment is big so it’s important to get it right. For me a close and hold above prior $128.73 highs is the confirmation I would be looking to go long. If, on the other hand, price closes and stays below the red horizontal support line at $102, I would expect a quick and violent decline back to fill the open gap below
Below is a re-annotation of the original chart I posted cleaning up some of the noise and making the gap I was referring to more apparent.
A gap is an area on a price chart in which there were no trades. Normally this occurs between the close of the market on one day and the next day's open. Lot's of things can cause this, most of the time it is news driven such as an earnings report coming out after the stock market has closed for the day. If the earnings were significantly higher than expected, many investors might place buy orders for the next day. This could result in the price opening higher than the previous day's close. If the trading that day continues to trade above that point, a gap will exist in the price chart. Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement.
There is an old saying that the market abhors a vacuum and all gaps will eventually be filled is why in my post I said
If, on the other hand, price closes and stays below the red horizontal support line at $102, I would expect a quick and violent decline back to fill the open gap below
The chart below is that of ACIA but brought up to date as of Friday’s close.
The 30% decline in less than 3 weeks fits my definition of a violent decline. While I would expect at least a small period of consolidation after filling the gap, momentum is still falling and price is just beginning to reach oversold conditions as such it looks like ACIA has more downside. If you took the short trade as mentioned in my original post, you have a handsome profit and this is a level I would be taking at least half off the table. I very much like ACIA long term and will likely find a place for it in our portfolios but that won’t occur until all selling has exhausted and we begin a new uptrend. When and at what level that will occur, only time will tell.
The take away here is gaps are a significant technical development in price action and chart analysis, provide important clues about potential future support and resistance levels and as such should hold a place near and dear to all investor’s hearts.