brary sary utes cto née (5/0| }4 082 oom highest price sen on the day ofthe gap. Because of its constrcton, a gap een ona weekly chart would Ihave tobe from Fridays highest price tothe lowest price on Monday. Breakaway Gaps ‘The breakaway gap i probably the most important gap to recognize, and perhaps the most useful to dnvestors, becanse it can indicate the beginning of a major move. Thinking back to the chapters on rajor tops and bottoms, breakaway gaps ean oceur when a pattern has been completed. Prices could gap above the neckline of an inverse head-and- shoulders bottom or gap down from a triple top. Breakaway gaps typically oceur on heavier than normal volume, and many times donot get filed. A sap gets filled when prices trade into the price void. Breakaway gape in commodity trading often happen because of a shiit in supply. Demand for commodities tends to change slowly with poptlation growth and growth in disposable income. Sifts in supply tend to be overnight surprises when crop reports are released. Prices gap up or down in response to the news. Examples of Al=/oNa this can be seen in Figures 12.1 and 12.2. Breakaway gaps in equities tend more to be a shift in demand. Prices adjust with a gap to a takeover bid, a share buyback announcement, or something like beating an earnings estimate, + Tactics and Trading Strategy A breakaway gap can be a pleasant surprise or a rude awaking, depending on your position. Ifyou are long on a stock in a base pattern and it gaps higher to start a strong up trend, then you are probably in the drive's seat. If you are long, you only need to worry about where to buy more. If you hhave no position, then you want to find a spot to jump in. Ifyou are short, you want to cover as best as possible, On the trading desk where I learned aboutthe close below th high dey, Talo leamed to divide the breakaway gap by two and to use scale-dovn buy orders to get long or to cover short. ‘The breakaway gap that is accompanied by high volume might not dip at all, but there are enough ‘occasions after the first trade of the gap that some profittaking occurs and prices dip a little. This small intraday pullback can oceur if aggresive short-term traders decide to book some quickAB jun’ Kindle for PC - Chart Patterns (Bloomberg Financial) Bie wew Go [eos hap profits if they went long ahead of the gap. If prices continue to move higher, you need to buy at the market; otherwise, try to use a partial Ailing of the gap toyour advantage. Runaway Gaps Runaway gaps or measuring gaps, as they are also mown, occur in the course of an established up ‘trend or down trend. These up trends and down trends are usually pretty strong with only shallow, minor corrections along the way. Prices are in a clear trend up or down, and then a gap appears because of a fresh piece of bullish or bearish news. ‘Figure12.3 shows that these gaps tend to occur in ‘the middle of a move. By measuring the length of ‘the move before the gap and adding the distance in points to the other end of the gap, you can project a major move, FIGURE 12.1 Breakaway gap up Source: Bloomberg,FIGURE 12.9 Runaway gap Bie actan 00 ee FIGURE 12.2 Breakaway gap down Source: Bloomberg yeas HeeAB Ajur's Kine for PC - Chart Patterns (Bloomberg Financial) fe yew Go Bow Ep + Tactics and Trading Strategy Runaway gaps appear with fair regularity, so traders should capitalize on them when they encounter them. The measuring technique works sore often than not. Exhaustion Gaps Exhaustion gaps appear at the end of major up and down moves. Prices go up and up, with some traders out and looking for a retracement to buy and other traders short and looking for a dip to cover. Both of these groups hang on and, at the worse possible time, they both blink. The traders ‘who keep hoping for a pullback to buy just give up and go to the market. The short sellers who stubbornly hope fora dip to cover just give up and also goto the market. The combination of these two forces generates the exhaustion gap. The exhaustion gap tends to be filed quickly and signals a potential trend reversal. After all those stubborn longs and shorts are satisfied, who else is left? When the buying i exhausted, the rally is close toanend. ‘Exhaustion gaps can and do appear near the end of down trends. Prices sink and sink, and stubborn Jongs hang on and on until they finally throw in the towel and dump thei positions. The finel purge of the longs creates the gap to the downside; because the selling is exhausted, the gap is soon filled as in ‘Figure 12.4 on Starbucks. + Tactics and Trading Strategy It is important to know that exhaustion gaps develop near the end of major trends. An exhaustion gap in a mature up trend can alert you toa top pattem, and an exhaustion gap late in a down trend can foreshadow a future bottom or base. FIGURE 12.4 Exhaustion gap Source: BloombergA Asjun’s Kindle for PC - Chart Pattems Bloomberg Financial) Ble view Go [pee ep {trav |< o W Be aa au ae | 7 | gt? sei | fz ‘ oa i an A CHAPTER The Future of Chan WHO REALLY KNOWS WHA Technical analysts can see t volume and make educated gt assign probabilities to possible as price targets and cycle low know? In addition to price tre demographic trends and inte ada color to our forecasts. Sc Faith Popcorn, can entertain © the commercial trends they technicians, such as Robert Pr social trends and economics in tothe markets. So, without cor Delphi, or using a crystal ball o see what the future holds fo believe 1 can offer three pos: future of chart patterns. The first option is to contin doing for more than one hu