Technical Analysis of Gaps: Identifying Profitable Gaps for Trading PDF
Preview Technical Analysis of Gaps: Identifying Profitable Gaps for Trading
ptg8126863 TECHNICAL ANALYSIS OF GAPS ptg8126863 This page intentionally left blank ptg8126863 TECHNICAL ANALYSIS OF GAPS I P DENTIFYING ROFITABLE G T APS FOR RADING J U L I E R . D A H L Q U I S T ptg8126863 R I C H A R D J . B A U E R , J R . Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistant: Pamela Boland Operations Specialist: Jodi Kemper Assistant Marketing Manager: Megan Graue Cover Designer: Alan Clements Managing Editor: Kristy Hart Senior Project Editor: Lori Lyons Copy Editor: Apostrophe Editing Services Proofreader: Kathy Ruiz Indexer: Lisa Stumpf Compositor: Nonie Ratcliff Manufacturing Buyer: Dan Uhrig © 2012 by Julie R. Dahlquist / Richard J. Bauer, Jr. Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evalu- ated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales out- side the U.S., please contact International Sales at [email protected]. ptg8126863 Stock charts created with TradeStation. ©TradeStation Technologies, Inc. All rights reserved. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher. Printed in the United States of America First Printing June 2012 ISBN-10: 0-13-290043-2 ISBN-13: 978-0-13-290043-0 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educación de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Library of Congress Cataloging-in-Publication Data Dahlquist, Julie R., 1962- Technical analysis of gaps : identifying profitable gaps for trading / Julie R. Dahlquist, Richard J. Bauer, Jr. p. cm. ISBN 978-0-13-290043-0 (hbk. : alk. paper) 1. Stocks—Charts, diagrams, etc. 2. Technical analysis (Investment analysis) I. Bauer, Richard J., 1950- II. Title. HG4638.D34 2012 332.63’2042—dc23 2012010828 To Katherine and Sepp ptg8126863 This page intentionally left blank ptg8126863 Contents About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . xii Chapter 1: What Are Gaps?. . . . . . . . . . . . . . . . . . . 1 Chapter 2: Windows on Candlestick Charts. . . . . . 17 Chapter 3: The Occurrence of Gaps. . . . . . . . . . . . 43 Chapter 4: How to Measure Returns . . . . . . . . . . . 71 Chapter 5: Gaps and Previous Price Movement. . 107 Chapter 6: Gaps and Volume . . . . . . . . . . . . . . . . 121 Chapter 7: Gaps and Moving Averages. . . . . . . . . 139 ptg8126863 Chapter 8: Gaps and the Market . . . . . . . . . . . . . 159 Chapter 9: Closing the Gap . . . . . . . . . . . . . . . . . 205 Chapter 10: Putting It All Together . . . . . . . . . . . 219 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 Acknowledgments We first started looking at gaps because they provide useful illustrations when teaching our students how to read stock charts. Students hear a news report that their favorite company just reported earnings, that a company is being sued, or that a well-known company, such as Apple, is launch- ing a new product and ask how these events will affect the price of the stock of the company. These news events often trigger sizeable price moves, frequently on a gap. We can introduce the concept of a gap easily and quickly and then use the conversation as a jumping-off point for broader discussion of the tools of technical ptg8126863 analysis. Gaps repeatedly come up during small talk when people find out that we have a background in technical analysis. Even individuals who know little about the stock market seem to have heard the adage “the gap is always filled.” The two technical analysis terms that people seem to latch on to are “head and shoulders” and “gaps.” After engaging in a number of these con- versations, we thought it would be interesting to pursue this topic a bit more. Gaps seem to have captured the attention of the earliest technical analysts, but we found surprisingly little systematic study of gaps. Much of the recent work in the area of technical analysis has been based on complex mathematical models. We thought it would be a fun and interesting endeavor to investigate one of the simple, basic ideas of technical analysis in more depth. Thus, a couple of years ago we began our inquiry. Acknowledgments ix In the beginning, we thought we would engage in a simple study that would provide some interesting stories regarding gaps to use in our classrooms. As we started looking at gaps, our appreciation for their use as a tool of technical analysis grew and our inquiry grew. In May 2011, we were honored as recipients of the Market Technicians Association’s Charles H. Dow Award in Technical Analysis for our paper, “Analyzing Gaps for Profitable Trading Strategies.” We realized that in our paper we had only been able to scratch the surface of gaps. Our editor, Jim Boyd, suggested we continue our investigation in the form of a book—the result of which you are holding in your hands. We are indebted to a number of people who helped us learn more about gaps and who helped put this knowledge together in the form of this book. First, we ptg8126863 are indebted to Charlie Kirkpatrick for all the support and assistance he has given us in learning about techni- cal analysis over the years. His knowledge and patience are endless. Ellie Kirkpatrick, Charlie’s wife, is the greatest cheerleader anyone could have in their corner. She continues to motivate and inspire us. We thank both Charlie and Ellie for the endless list of things that they have done for us and our children. We would like to thank Fred Meissner and Hank Pruden for their support and encouragement. They are both stellar examples of the friendliness and warmth exhibited by many in the technical analysis community. They, too, have been especially kind to our children. Thanks to all those who work in the MTA office, espe- cially Tom Silveri, Tim Licitra, and Shane Skwarek. This project has benefited from conversations with members of the MTA through electronic discussion groups, web- inars, and meetings across the world—from Houston to
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