Table Of Contentptg8126863
TECHNICAL
ANALYSIS
OF GAPS
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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 .
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© 2012 by Julie R. Dahlquist / Richard J. Bauer, Jr.
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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
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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
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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
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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
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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
