Gaps as Hints

June 9, 2020, 10:32 am EDT

Gaps as Hints

Gaps are formed from sudden change of momentum, either up or down. It means market bias changes suddenly overnight to a much higher degree that goes beyond past days or weeks. Therefore, gaps provide important hints for future action. More importantly, if gaps occur with significant volume, then its impact could last longer. 

Please refer to the DIA chart where February (02/24) gap-down formed resistance. Three days ago (06/05) a gap-up provides a support zone. 

Therefore, we can check today’s pullback to determine whether this is a bullish pullback or reversal, meaning a change of direction to downside. If this gap is not filled and DIA bounces up again, then we assume uptrend continues. Otherwise, filling the gap and keeping down indicate reversal. 

DIA has been up about 40% in the past two months, so reversal will offer much space for downside opportunity if it happens. 

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