Gap Trading

8/14/2019 Gap Trading

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Trading GapsTypes and Characteristics of Gaps

Knowing where the gap is located in the chart can quickly help identify whattype of gap it is...

Gaps are a common occurrence in the markets. Everyday there is always at least one

stock that has gapped up or down when the market opens. Why? As long there is some

event happening somewhere between the market close of the previous day to theopening of today, there will be gaps. Even if the markets eventually move little by littletoward the inevitable 2!hour format, there will always be gaps. After all, somewherearound the world, there is some event happening during the weekends as well. "lus,there is always an e#cited group of investors who making a big deal out of somethingoreven for no reason unknown to the rest of us. $o, gaps are a fact of life and there is noavoiding it. %he best thing is to take it in stride and learn how to profit from it.

%here are three different types of gaps& 'reakaway, (unaway and E#haustion gaps. Eachof these gaps appear at a different cycles of the markets.

'reakaway gaps occur when a stock has been in a consolidation stage) instead of anormal market!session move, it breaks out with an opening gap. *ormally, these gap inthe same direction before to the consolidation stage. %here is one caveat& when thebreakout happens, it can be in either direction. %his gap is trickier than the others

because the intent of direction is unclear.
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+n the chart e#ample above, the market was going through a correction. When it finally

finished consolidating a symmetrical triangle pattern-, it broke out with a gap to theupside to end the correction period.

As for (unaway gaps appear when the stock has been trending for some time. +nstead ofa normal move up during market hours, they open with a gap in continuation of thedominant trend. +t shows there is more interest in the stock, possibly by some positivenews to further boost the investors eagerness to own it. (unaway gaps are also called

easuring gaps because they are often used as a centering point of measurement fromthe beginning of the trend to the gap, then from the other side of the gap to measure thene#t likely level where it would reach.

%he chart below shows the prevailing trend, moving steadily upward. Along comes theopening gap, pushing in the same direction higher, not even a moments pause orpullback until much laterin the trend.
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'elow is the e#ample of how a (unaway gap is also used as a easuring tool. When thegap has been identified, the measurement is taken from the beginning of the trend/0.1- up to the bottom of the gap 3.4-. 5rom that distance, it is used to measurehow far the prices will likely to continue. $o the measured target starts at the upper partof the gap 042./- to the e#pected level above it. +n this e#ample, the target was064.23. %his is a very powerful and easy!to!apply concept which can be used to findprofitable trades.
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%he last type of gaps is the E#haustion gaps. %hese occur when the market has beentrending for a long period of time, normally after a bull market or bearmarket that as

been lasting for a few years. When it appears, there is a period of slowing of the trendslowing, or period of consolidation. %hey usually appear near tops or consolidation areasafter strong trends. any times, the E#haustion and 'reakaway gaps are mistaken forone another. 7epending on the location and whether or not it was an up gap or a downgap. %he E#haustion gap is an up gap appearing in the market tops, and a down gap inmarket bottoms. As for the 'reakaway gaps, they are up gaps in market bottoms and

from consolidations- and down gaps on market tops and from consolidations-.

'elow is e#ample of each to better identify the difference. %he market has been forming

what look like a top, with the symmetrical triangle consolidation. %riangles are usuallytrend continuation patterns, but as the chart shows, the gap was break away from the

pattern to the downside. %his is a breakaway gap. After that gap, 89:: attempted topush prices up again with an up gap. %he prices gapped up to a new high, then turned

around immediately the same day. %hen the ne#t following days, the prices filled thegap, confirming that the previous gap and the direction of the market now downtrend-are real. %he E#haustion gap was at last identified as such when considering thesurrounding price action. %he action created an island reversal.
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%he e#ample below is the e#haustion gap down- at market bottom. %he market hasbeen trending down with determination. 5inally, a blow!off came with a big gap down,but there were no more selling. %he ne#t few days show the market stabili;ing, evensome buying. 5inally, more buying pushed the market higher, ending the market bottom.


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chart courtesy ofMastertrader.com

The nicest plays are where a stock ets extended and then aps in resistance 'for a short(.)owever, there are ti!es a stock !ay not have a resistance area, like when at new recenthihs. #hy short a stron stock? #ell, nor!ally we would not. ut this stock is overextended. *ook at the +-period !ovin averae 'red(. otice how far away we are now asco!pared to in the past two !onths. otice that there were six days up in a row, all of the!since the breakout fro! the base, or consolidation area on the daily chart. *ook at theincreasin volu!e as shown by the last three reen bars on the daily chart. ow, on the lastday shown, the stock aps up. That is the key. This is known as a Novice Gap. The

lateco!ers are decidin that now is the ti!e to buy. This is where the opportunity is, on a daylike this on the ap up. This is a uerrilla type tactic that should be used for the day, or

possibly one overniht.

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elow is another exa!ple on a lon play.
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)ere aain, look at the distance fro! the +-period !ovin averae. There are five days downin a row. ne thin !issin here is the bi increase in volu!e on the last day. )owever, lookat the si/e of the ap. This is a lare ap after five days down.

)ere is a slihtly different play shown below in 0%%1.


otice all the sa!e thins here. The distance fro! the +-period !ovin averae, the nu!berof days up, and the increasin volu!e are all present. )ere, the stock does not ap up in anovice fashion, but rather it aps down '2 cents(. This is known as a #rofessional Gap.Profit takin sets in and the stock drops. This stock opened on its hih of the day. #e shortedthis stock at +3.4 with a stop at the hih of the day, 56 cents away. #e took half profits atour first taret +7.+8 and are trail stoppin what will hopefully be a swin trade.
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There are two nice thins about playin aps that !any traders like. 9ou can usually havevery tiht stops, 'or can pass on the ones where you do not(, and you usually et so!e resultsfairly :uickly. ften reversal ti!e '5; %.


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earis( Gap $eversal Guideline $e)uirements

0. A stock that has a consistent trading range of at lease 0.3> points.2. $tocks that have a decent spread. Although a stock is often entered with an E*, a trader does not want to

be severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow forcushion.

6. %he stock should be up at least two days in a row before it becomes a consideration.. :pen of the current day @$% be in the low 2> of the dayBs price range.>. lose of the current day @$% be in the top 2> of the dayBs price range.

Ne,t tradin day-s .&TI+N

0. +f the stock gaps open to the upside and then begins to fall back, sell it short at 0C to 0C below the previousdayBs high. +f a trader misses that entry, sell it short when it trades below its first one!half hour low. arketmakers should be selling the stock as well.

2. $topCloss should be 0C to 0C above the current dayBs high.6. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount

that is reasonable for the stock and get out at that point. +f the market andCor sector remain weak, a trader isin very positive territory and should hold it for the ne#t day or two.


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Types and &(aracteristics of Gaps

Trading Gaps - Part 4

Tradin Stocks "ducation - Tradin tactics &exa!ples

Mornin Star Gap $eversal Guideline $e)uirements

0. A stock that has a consistent trading range of at lease 0.3> points.2. $tocks that have a decent spread. Although a stock is often entered with an E*, a trader does not want to

be severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow forcushion.

6. %he stock should be down at least two days in a row before it becomes a consideration.. :pen of the current day @$% be in the top 2> of the dayBs price range.>. lose of the current day @$% be in the bottom 2> of the dayBs price range./. Above average volume on the current day is preferable.
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0. +f the stock gaps up on the open at least 0C2 point to one point- above yesterdays closing price, buy itimmediately. +f a trader misses that entry, buy when it trades above its first one!half hour high. arketmakers should be buying the stock as well.

2. $topCloss should be 0C to 0C below yesterdays low.6. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amountthat is reasonable for the stock and get out at that point. +f the market and or sector remain strong and atrader is in very positive territory, the trader should hold it for the ne#t day or two.

Super Diverence lueprint- *earn how to discover $hidden$ !arket !oves.There are points in any !arket 'stocks, forex, futures( where a "diverencepattern"occurs that could trier a potentially hue !arket !ove that !osttrend-followin !ethods would otherwise !iss?Super Diverence lueprint

by #rofits$unreveals how you can discover idden Tradeswith astonishinsi!plicity. &lic' To Get More Info!

/venin Star Gap $eversal Guideline $e)uirements

0. A stock that has a consistent trading range of at lease 0.3> points.
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2. $tocks that have a decent spread. Although a stock is often entered with an E*, a trader does not want tobe severely hurt by the spread. $tocks should also have an ade=uate number of market makers to allow forcushion.

6. %he stock should be up at least two days in a row before it becomes a consideration.. :pen of the current day @$% be in the low 2> of the dayBs price range.>. lose of the current day @$% be in the top 2> of the dayBs price range./. Above average volume on the current day.


0. +f the stock gaps down at the open at least 0C2 point to one point- below yesterdays closing price, sell itshort immediately. +f a trader misses that entry, sell it short when it trades below its first onehalf hour low.arket makers should be selling the stock as well.

2. $topCloss should be 0C to 0C above yesterdays high.6. Dook closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount

that is reasonable for the stock and get out at that point. +f the market andCor sector remain weak, a trader isin very positive territory and should hold it for the ne#t day or two.

indows 1Gaps2

#indows as they are called in Capanese Dandlestick Dhartin, or =aps, as they are called inthe west, are an i!portant concept in technical analysis. #henever, there is a ap 'currentopen is not the sa!e as prior closin price(, that !eans that no price and no volu!e transactedhands between the ap.


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% Gap 3poccurs when the open of 1ay + is reater than the close of 1ay 5. Dontrastly, aGap Downoccurs when the open of 1ay + is less than the close of 1ay 5.

There is !uch psycholoy behind aps. =aps can act as;

$esistance; nce price aps downward, the ap can act as lon-ter! or even per!anentresistance.

Support; #hen prices ap upwards, the ap can act as support to prices in the future, eitherlon-ter! or per!anently.

Windows Example - Gaps as Support & Resistance

The chart below of eay '"%9( stock shows the ap up actin as support for prices.


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ften after a ap, prices will do what is referred to as "fill t(e ap". This occurs :uite often.Think of a ap as a hole in the price chart that needs to be filled back in. %nother co!!onoccurance with aps is that once aps are filled, the ap tends to reverse direction andcontinue its way in the direction of the ap 'for exa!ple, in the chart above of eay, backupwards(.

The exa!ple of eay '"%9( above shows the ap actin as support. Traders and investorssee anythin below the ap as an area of no return, after all, there was probably so!e positivenews that sparked the ap up and is still in play for the co!pany.

The chart below of #al-


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=aps are i!portant areas on a chart that can help a technical analysis trader better find areasof support or resistance. For !ore infor!ation on how support and resistance work and howthey can be used for tradin, 'see; Support & >esistance(. %lso, =aps are an i!portant part of!ost Dandlestick Dhartin patternsE 'see; Dandlestick asics( for a list of candlestick patterncharts and descriptions.

That is a lot of data to take in but @ will try to hihliht so!e of the !ore relevant ite!s. Thefirst interestin fact is that the A updown over the past 5 years has been relatively stablewith the 5yr. av bein 64A up versus 42A down. "ven the hue rally since early +G didnot cause the ap data to chane very !uch.

#hat has chaned over the past few years is the si/e of the =aps H look at the +5-+2data versus the +7-+5 data H lareraps are !uch !ore fre:uent lately. This is why in

part @ thouht that this blo would be so!ewhat ti!ely and relevant.

The last chart analy/es the =aps to see if they fill prior to the !arket close. 9ou can look atthe historic data yourselves, but what @ wanted to point out in this blo is the +5 data. For

down =aps less than I.6 in the SP9 look at that data H G4A fill rate. That is about asclose as you can et to a uarantee. )elicopter en and the Federal >eserve oard have!ade s!allish down =aps al!ost free !oney. The last thin @ will point out for +5 is theJp =ap data for =aps I.76 and larer H look at how the fill rate dropped in +5. Talkabout =ap and =oBB #e should all thank Jncle enB

Stoc' /,amples4

For the re!ainder of this blo @ thouht @ would show so!e exa!ples of how @ look at stocksthat !ake lare pre-!arket aps. "ach of the three illustrate different aspects so @ thouhtthey should all be included.
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Do!!on to all of these exa!ples is how @ prepare for the !arket open. @ like to have !y 6-!in chart set to show the pre-!arket tradin fro! 3a! so @ can draw hori/ontal lines at thehihlow pre-!arketprices. This is the rane that @ watch to see how the !arket trades afterthe nor!al hours open. #ill the stock break the pre-!arket rane hihs?? @f not then you canexpect so!e down side testin.

S#5

)istorically any ap hiher than about I.7 indicates a real possibility for a =%P and =ostart to the day. Today we saw a I.G2 =ap. )ere is the SP9 6-!in chart;

%fter drawin the pre-!arket raneinto the chart we let the !arket open up to see what willhappen. The pre-!arket rane is pretty tiht I5+2.73-I5+2.2+ H this tiht of a rane with thesi/e of ap 'I.G2( !akes !e lean to o lon on the break hiher of the pre-!arket rane orthe hih of the first 6-!in candle. This happened on the 8rd candle.

The key is to buy a core position for Trend 1ays and then trade around that position. Sell

your tradin position on extre!es and buy on pullbacks. For extre!es @ like to watch !y>S@'+( 6-!in chart and @ look to sell when that readin is K GA. n pullbacks, @ look for the5!in-stochastic to et oversold 'i.e., L or around +6(. @ circled in reen two of the !oreobvious pullbacks. n Trend 1ays it is also very nor!al to buy any pullbacks into the +e!aH this never really happened until the purple circled area. The thin to note was that beforethis pull-back, the SP9 failed to !ake a new hih on its 5+;56p! eastern push. That is al!ostto be expected since trends often pause durin the nor!al lunch hour break '5+-5;8p!ish(.#hat this lower hih should do however is warn you to not auto!atically buy the retrace!entinto the +e!a H be a bit suspect.

That would have indeed saved you so!e !oney here in the SP9 as it chopped lower over the

lunch hour and then finally broke the Mline in the sandN that !ost professional intraday traders
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utili/e H the 6e!a on the 6!in chart. The SP9 !ade a bear fla kind of rally into theclosin ti!e period so @ a! expectin so!e weakness at least first thin to!orrow.

This blo is ettin too lon so @ will be brief on the last two exa!ples;

6&74

The FDO chart is slihtly different than the SP9 early on 'click on the chart to enlare(.

9ou can see that FDO had trouble at its pre-!arket hih levels once the !arket opened. Thefirst push throuh that line ca!e at G;66a!. The fact that it took +6!in was your firstwarnin that it was not likely to o shootin straiht up. @n fact the first candle to break thislevel actually closed back below the !arker line.

The s!artest thin to do is to see how FDO does when it tests the lower end of its K G;8p!price rane. Price pulled into the +e!a 'red circle( and the >S@'+( sinaled to try and olon here and that is what @ did. The 6!in chart ot over bouht at the upper bolliner and

was confir!ed by the >S@'+( 'reen circle(. This is where @ sold.

8*S4

The last exa!ple is *S H *S had the biest pre-!arket bounce of the three exa!ples. @tapped open +.36A versus .72A for the SP9 and 5.8A for FDO. This should be a warninsinal for you 'click on chart to enlare(.
http://blog.tradingwithleafwest.com/wp-content/uploads/2011/01/FCX_Jan3-2011_5min.png


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9ou can see in the chart that the !arket opened up and *S :uickly shot above the pre-!arket rane, but the absolute level of the !ove should have caused so!e caution. The firstcouple of candles showed upper les which aain should have raised your antenna.%ressive traders could have started tryin to short *S here with the )1 as their out. @hate shortin stocks at the start of a potential Trend 1ay H in !y opinion there is no :uickerway to lose !oney. %s @ !entioned thouh, *S was really stretched so @ can see the

rationale here in this case.


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new charts" etc." so it will help possi#ly clarify some of the points as well. $ will take(uestions following the class" so please hold off until then since often $ find that manyof the (uestions people have mid-way end up answered #y the time $ am doneanyway. )*

%imply put" support and resistance levels are places in the market when the currenttrend or price move that is in play in the market will either turn or stall. The traits ofsupport and resistance levels applyto all type of markets and time frames" so theconcepts in this class will figure into any market you trade.

+ow" when thinking of support and resistance levels" it is very common for mostpeople to think of them in terms of a#solute price levels. For instance" if they arelooking at , as a resistance levels" they mean e/actly ,. On the other hand" ifthey are looking at moving averages as a support level" they will check to see whatthe e/act price of the moving average is" such as ,.01.

$n reality" support and resistance levels are not e/act prices" #ut rather price 2ones.%o" if the resistance level is ," then it is actually the 2one around that , level thatis the resistance. The stock may hit only ,43.10 or it may hit ,. and still hold the, as price resistance.

The main factor in determining e/actly how much the e/act prices are tested #y ishow (uickly or slowly the prices move into that resistance 2one. For instance" if the2one hits very (uickly on a large momentum surge" then it is more likely to hit that,. level. This is also the caseif the stock is a rather volatile one with a wideprice range intraday. $f the security spikes higher and does not (uite hit the priceresistance" such as a spike into ,43.0" then it may round off into , with slightlyhigher highs and never e/actly touch the , price resistance 2one #efore turningover due to the slowdown in momentum into that resistance. The larger the timeframe" the greater the price 2one is as well. 5 resistance 2one at , on a weeklytime frame may have a range of ,6 on each side of ,. 7here traders tend to runinto trou#le is in thinking that #ecause the stock has traded over , #y more than8ust 6 cents that the , has #roken" so we often hear of people 9#uying the highs9or 9shorting the lows9 in the case of support.

For today's session $ am going to focus on 4 main types of price support andresistance. They are 7:O;< +=>?y third grader has 8ust spent her first semester in school learning

how to average and to round up or down. That is then taken with us throughout ourlives.
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F$B=< 6 - ,G$ aily

For futures traders a common level we will notice in the +D is how that tends togravitate to moves of points at a time and stall at or a#out the point increments.$n the H> the 6 point increments" and particularly the 6 point levels catchpeople's attention and reversals or consolidations tend to form at those 2ones. $n thechart of the ow Gones $nd. 5verage EFigure 6* we can see how it often movestowards those 6 point increments as well. The 6" and 64" level are themost pronounced in this case" #ut many of the places it stalls at are almost e/actly ata 6 point price level.


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:ere is another e/ample of price support and resistance EFigure *. This time it is in arather cheaply-priced stock that $'m sure you've all heard of... G?;= EGet?lue5irways*. 5t times" the support or resistance 2ones will appear to #reak" pushingthrough the s&r level only to swing #ack and hug that level. This was the case in>arch and early 5pril in G?;=. G?;= had fallen into ,6 on rapid momentum"pushing it somewhat under the e/act price support of ,6. $t then hugged that levelfor over a month #efore giving way to another round of selling into the ,6 support2one. Once again the momentum was strong" so it traded slightly under that e/actprice #efore pulling highs. 7hen it tested it the second time around" however" in themiddle of Gune" it held that price more precisely since the momentum at that pointwas not as steep. This second test of ,6 was then followed #y a retracement #ackinto the ,6 level. Once a support 2one #reaks" such as the ,6 level in G?;=" that2one then #ecomes resistance on a reversal.

F$B=< - @;$ aily


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:ere is another e/ample that you can look at which shows similar types of priceactivity EFigure *. +otice that the rapid move into +ovem#er with one #ar of sellingpushed through the ,61 e/act price level that first day it it" however" it then sprung#ack and coiled along that price support 2one. >any times this would present itselfwith a drop into something such as ,60.1 and then the ne/t test of the ,61 supportwithin the coil would hit ,60.3I" followed #y a third move which tests the ,61 e/actlyand holds" often forming a smaller congestion #ase at that e/act price #efore#reaking on that third test. Today @;$ reversed #ack into that price level and henceit served as resistance. The highs of the day were ,61.6 with a closing price of,60.10. ?oth were well within the ,61 price resistance 92one.9

The second type of price support&resistance that $ wish to cover is closely tied to thefirst. $t deals with retests of previous pivot highs or lows. 5 9pivot9 is simply a levelwhere prices reverse. Hou can usually identify them #y the 9A9 or upside down 9A9that they form. Hou may not see them unless you drop down to smaller time framesif the security is in a congestion. %ometimes these price pivots correspond to whole

num#er s&r" sometimes they do not.

F$B=< 4 - ,G$ aily


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$n this e/ample of the ow" it does correspond to the whole num#ersupport&resistance levels EFigure 4*. 7e are looking first at the 64" level. This hitin Guly for the first time and then retraced #ack into the prices from the first (uarter.7hen the ow hit the 64" 2one for the second time" it was actually at the end of%eptem#er that this took place" coming off a sharp rally mid-month.

The 92one9 of the 64" high was where all the price #ars overlapped at the initial64" highs. The stronger upside momentum on the second test of the 64"resistance level allowed the ow to push somewhat past the e/act high to form aslightly higher high #efore the momentum reversed and led the inde/ #ack into theprevious lows. The 5ugust lows were made on e/treme downside momentum. %incethe pace was slower into +ovem#er on that second retracement off the 64" highs"it did not (uite hit the e/act lows from 5ugust" #ut only came into the support 92one9of those lows.

F$B=< - G?;= aily


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5nother e/ample was the ,6 level $ had mentioned earlier in G?;= EFigure *. Houcan see that while ,6 hit and held on the first day into that level in 5pril. $t thenrolled over a #it off the lows" like the ow did off the second highs" and madesomewhat lower lows. $t did not (uite hit that ,6 support the second time around"although it did retest the 92one9 of that support in Gune.

7hole num#er support&resistance can also #e tied into the third type of pricesupport&resistance) congestion 2ones. 7hen a security falls into a trading range"congestion 2one" #ase" coil" or whatever you wish to call it" that 2one #ecomes s&r onany retracement once it has #roken. 5 #reakout to the upside from a trading rangewill mean that the range itself #ecomes support on any retest of it. These tradingranges often take place around whole num#ers.

F$B=< I - ,G$ aily


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5s in the other types of s&r" the stronger the congestion is retested" the more thesecurity can penetrate that s&r 2one. 5 more shallow move into the congestion after it#reaks lower and is moving higher" such as in 959 in Figure I" can mean that thelower end of the range tests and holds first like it did a few weeks #efore 959.

5 stronger move" such as into 969 on a pull#ack off highs on an upside #reakout" canlead it to testing the lower end of the channel #efore it sees much reaction. $n J italso pulls into the lower half of the earlier congestion" which also corresponds to the6"4 whole num#er support and the pivot high in 9?9. $n this case" J has all threetypes of price support we have covered thus far interacting at the same time" makingit a very su#stantial support level!

F$B=< 0 - G?;= aily


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5nother e/ample of this type of s&r also took place on the chart of G?;= EFigure 0*.+ot only was the Guly test of ,6 a return to the whole num#er as price resistance"#ut it was also resistance from that earlier congestion level.

F$B=< 1 - @;$ aily

@;$ has two e/amples EFigure 1*. The first is a larger congestion #ack in %eptem#er

and the second is 8ust a three day congestion in mid-Octo#er. %ince the price dropinto the larger congestion was very rapid" it pulled to the lower end of it in the second


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half of Oct." while the smaller congestion served as resistance on the #ounce off theOct. lows.

The final type of price support or resistance that $ will show you today is an e(ual ormeasured move. Hou can call them whichever you wish )* This concept is rooted in

momentum as well.


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@;$ EFigure 6* also had this take place when the correction off the Oct. lows gaveway and the new congestion 2one into +ovem#er #roke lower at the same rate ofselling as it had seen heading into that congestion level. $t was una#le to mimic themove for a third time" however" due to a much more su#stantial support level fromthe lows in I. This was the first time that larger support 2one had #een retested"so it was una#le to easily #reak through it.

%maller time frame support or resistance levels will always #e easier to #ust thanthose on a larger time frame" even though the 2ones on the larger time frames will #ewider. 5t the same time" support or resistance levels which have most of these typesof support or resistance hitting at a#out the same time will also #e stronger than ifonly one of these 4 hits at any given time. %ince the prices of each will not tend toline up e/actly" this is another reason you must consider them to #e CO+


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lines and trend channels, as well as how to use the! in your tradin. @ will bein with a verybrief review of what exactly supportresistance levels are and how to approach the!. Supportrefers topricesunder current levels, while resistance refers to prices above. "ssentially, theyare price areas where a security is likely to have so!e sort of reaction to that price area. Thekey word here is area, or /one is another word that could be used. Supportresistance

levels are T exact prices, even if you !ay think they should beB "ven I5 is not an exactresistance price if a security is !ovin hiher into it. >ather, it is the /one around that price,which can be wide if the volatility is hih and !o!entu! is stron headin into it, or can berather narrow if volu!e is low and the !o!entu! or pace of a !ove into the resistance isradual.

Fro! last week you !ay recall that we looked at a specific type of price supportresistancewhereby we looked at previous hihs and lows as supportresistance levels. Today$s class

builds upon that concept. % :uick review of it is shown with this exa!ple in Fiure 5 of the"S fro! the last couple of tradin days. The "S has been in what is called a tradin rane orconestion /one durin the past 4 sessions. This !eans that !ost of the prices fell within a

iven price rane. n the 57th, the day bean with a narrow rane. U4 and U6 !arked thelower end of that rane. U4 was support, which held when tested a second ti!e.

F$B=< 6 - $+=T> T$K

O#viously" as with any tool for reading the market" the support and resistance 2onesare 8ust one factor in a larger picture. Figure shows a great e/ample from thisafternoon where the trend channel support&resistance action in play. The initial trendchannel can #e drawn #y connecting 5 to ? and then e/tending that line downwardand then connecting 6 to and doing the same.

+otice that the selling increased with each downside move. This pushed the pricesinto that lower trend channel more than if the prices had declined at a similar rate as

#efore. :ence" the support had more 9give9 to it. 5fter #ouncing #ack" the channelheld again at " forming a smaller and slower drop around 6)


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now open for a confirmation of the trend change.

F$B=< 4 - $>> T$K

5nother e/ample soon followed in Figure 4. 7hat $ want you to pay attention to hereis that when $>> tested the upper trend channel at " it did not immediately pull#ack off that level. 5lthough earlier it had pulled off it gradually in in Figure " thistime it hugged it. ?oth of these are variations on the same thing) momentum change.?y hugging the resistance level or pulling off it very slowly" it creates the scenario forthat resistance level to #reak. +ow" in this second e/ample it attempted to do so too(uickly" and hence congested longer" however the theory is still the same.

5nother e/ample of the channels is found in BOOB from today in Figure . Thechanneling action in BOOB was a primary contri#utor to it #eing the main focus ofmy attention this afternoon. $n BOOB we had a series of channels forming and#reaking" each more #ullish than the ne/t.

F$B=< - BOOB T$K


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The first channel #egan right away out of the open. $t was a slow downtrend into6)


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Figure I shows the progression of the trend channel out of the open in BOOB. 9?9had not (uite touched the upper channel line" so $ drew a new one to pro8ect out theupcoming support levels. +otice that the move into 6)6


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Figure 0 takes this channel out further and looks at the larger channel of theformation this morning. J6 is the support level we were 8ust looking at. $t held and ahigher high was made" #ut still under the initial morning lows. ?y pulling #ack againinto 66)


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nce a channel breaks, !o!entu! often chanes. This is shown in Fiure 5. %t this point,you have to switch to larer trends for identifyin upco!in resistance levels in the cases of!oves hiher and rely on the other technical tools in your arsenal to assist you.

F$B=< 6 - BOOB T$K


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Fiure 55 shows the channel acceleratin. #e put a taret on it of I2G due to the wholenu!ber resistance with the 5s in ==. This was also e:ual !ove resistance and priceresistance fro! about a week ao. So, while the trend channels and trend lines are so!ethinthat can be hihly beneficial, never rely purely on one type of support or resistance. The !ore

types there are co!in toether and the !ore attributes there are co!in fro! other technicaltools to co!bine with it, the better.

F$B=< 66 - BOOB T$K

3tiliin Support and $esistance 8evels : #art =Applying moving averages to identify support and resistance levels.Canuary 8, +3

=ood dayB @ hope that you had a wonderful holiday season and have not had to let our yourbelts by too !uchB For those of you who could not !ake it to the previous classes, the link

for the los is as follows;

Support>esistance Part 5;http;www.tradinfro!!ainstreet.co!classesDlassS>Part5.ht!l Support>esistance Part +;http;www.tradinfro!!ainstreet.co!classesDlassS>Part+.ht!l

ver the past !onth @ have been introducin you to so!e of the key aspects of usin supportand resistance levels in your !arket analysis and hence your tradin.


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which falls into the cateory of an indicator.

@ndicators are the visual representation of !athe!atical calculations based upon price orvolu!e activity. The indicators @ will be coverin today are very basic ones, which are used

by a lare percentae of the tradin populace; !ovin averaes. %s those of you who know

!y style are aware of, @ a! not overly fond of indicators in eneral.


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resistance are !erely price /ones. #hile a !ovin averae !ay have one exact price at anyiven ti!e, it is not that perfect price that typically !atters, but rather the /one of that price.Think of it as havin so!e cushion to it. " 5 -


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ood tip to keep in !ind, like all tools, it does not work each and every ti!e.

F@=J>" + - First Test of


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#hen a trend is not clear, as in a sideways conestion /one, then !ovin averaes tend toloose so!e of their power. Fiure 4 shows such an exa!ple. The + period si!ple !ovinaverae held for the !ost part when tested on the first day of a price !ove, but instead ofcausin a reversal, the !ovin averae ave way fairly :uickly in successive sessions.

F@=J>" 4 - anes U5http;www.tradinfro!!ainstreet.co!classesS>


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channel and based sideways while the !ovin averae cauht up to the prices instead of the!ovin averae hittin as a result of a pullback or bounce into it. The result was that iteventually ave way to a breakout hiher.

F@=J>" 6 - anes U+

http;www.tradinfro!!ainstreet.co!classesS>" 2 - Prices )uin


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@ hope that you have enQoyed this classB n Canuary 57th @ will be coverin yet another for!of indicator support and resistance; Fibonacci levels. For those of you who! are futurestraders, you !ay find that class to be particularly helpful. %

%ll !y best,Toni

3tiliin Support and $esistance 8evels : #art >

Applying fibonacci levels to identify support and resistance.Canuary 57, +3

=ood dayB For those of you who could not !ake it to the previous classes, the link for thelos are as follows;

Support>esistance Part 5;http;www.tradinfro!!ainstreet.co!classesDlassS>Part5.ht!l Support>esistance Part +;http;www.tradinfro!!ainstreet.co!classesDlassS>Part+.ht!lSupport>esistance Part 8;

http;www.tradinfro!!ainstreet.co!classesDlassS>Part8.ht!l

ver the last couple of !onths we have been lookin at different types of support andresistance levels, startin with the core price support and resistance and then applyin it tochannels, followed by !ovin averaes. @n today$s session @ a! oin to show you anothertype of indicator supportresistance tool. @ will be ivin an overview on utili/in fibonacciretrace!ent levels in your tradin.

The Fibonacci Series upon which these levels are based upon is a result of the work of an

@talian !athe!atician na!ed *eonardo Pisano, which went by the na!e Fibonacci. @n casethis sounds a bit odd, it is !erely a contraction for Son of onacio, who was his father. )e
http://www.tradingfrommainstreet.com/classes/Class_SRPart1.htmlhttp://www.tradingfrommainstreet.com/classes/Class_SRPart2.htmlhttp://www.tradingfrommainstreet.com/classes/Class_SRPart3.htmlhttp://www.tradingfrommainstreet.com/classes/Class_SRPart1.htmlhttp://www.tradingfrommainstreet.com/classes/Class_SRPart2.htmlhttp://www.tradingfrommainstreet.com/classes/Class_SRPart3.html


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observed that in nature there are certain patterns that appear to crop up and introduced a seriesof nu!bers to identify these patterns. The se:uence of the Fibonacci nu!bers is as follows;

, 5, 5, +, 8, 6, 3, 58, +5, 84, 66, 3G, 544.... up to infinity.

Startin with /ero and addin one beins the series. The calculation takes the su! of the twonu!bers and adds it to the second nu!ber in the addition. This is very excitin to you @ a!sure up to this pointB ;(

#here Fibonacci co!es into play in the !arket, however, is that after the eihth se:uence ofcalculations, there are constant relationships that can be derived fro! the series. For exa!ple,if you divide the for!er nu!ber by the latter, it yields .253.

8466 V .253535 W .253663G V .257G77 W .2533G544 V .25366 W .253

1ividin the latter nu!ber by the for!er nu!ber derives another relationship fro! these:uence. This relationship yields approxi!ately 5.253.

6684 V 5.257247 W 5.2533G66 V 5.253535 W 5.2535443G V 5.257G77 W 5.253

Traders use these ratios to !ake proQects upon a stock or co!!odity$s price !oves. #hen @first bean tradin, a friend of !ine introduced !e to the fibonacci series. Do!in fro! a

backround in archaeoloy, @ was already aware of its application in other areas, so itintriued !e that it would also work in the !arket. @ bean to play around with Fib levels. @kept it very si!ple. The !ain Fib levels @ use are listed on our charts pae. They are 583.+A,5A, 25.3A, 6A, 83.+A, A, and -83.+A. Two other nu!bers often used when applyinFibonacci nu!bers to chart analysis, .732 and 5.+7, are the s:uare roots of .253 and 5.253. @do not use these !yself and never have, but you will likely see the! referenced fro! ti!e toti!e if you decide to o !ore in depth in studyin Fib levels.

F@=J>" 5 - Fibonacci *evelshttp;www.tradinfro!!ainstreet.co!classesFib*evels.if
http://www.tradingfrommainstreet.com/classes/FibLevels.gifhttp://www.tradingfrommainstreet.com/classes/FibLevels.gif


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@ bean as an e:uities trader, but @ :uickly discovered that while Fib levels will work in thee:uities !arket, the probability is even hiher in the co!!odities !arket. @ have no idea whythis see!s to be true, but for that reason, @ tend to use the! !ore when tradin the "" + - "S Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacci5.if
http://www.tradingfrommainstreet.com/classes/Fibonacci_1.gifhttp://www.tradingfrommainstreet.com/classes/Fibonacci_1.gif


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This is the trend !ove that we were followin yesterday !ornin. @t contained the typicalthree waves and was the breakdown !ove out of the prior day$s conestion. nce thedowntrend channel broke shortly after 55; a! "T, then you can use your trend tool set tofibonacci and connect the hihs of the downtrend !ove to the lows of the downtrend !ove.This proQects each of the fibonacci levels fro! that point onward.

#hat @ find intriuin about Fibonacci levels is that when @ draw the! on a !aQor trend !ove,

such as on a 56 !inute ti!e fra!e, if @ leave the! in place overniht, the will continue tohold in days to co!e, even as !ore trends are created on that sa!e ti!e fra!e. bviously ifyou continue to do this without cleanin it up then your charts will beco!e rather clutteredthouhB

F@=J>" 8 - "S Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacci+.if


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The i!ae in Fiure 8 is the sa!e one as in the previous chart, but it shows the proQections ofthe fibs, alon with the sr levels identified. otice that headin into noon the !o!entu! wason the stroner side, so on the second wave of upside off the lows, after first stallin at the83.+A retrace!ent, the "S continued past the 6A level and into the 25.3A /one. #hen acontinuation pattern is for!in, it is rather co!!on to see a security chop around between the83.+A level and 25.3A level before breakin hiher. 9ou can use this to help proQect price

tarets on a breakout. #hen the prices are evenly displaced between those two levels, then theprice proQection on a breakout is also an e:ual !ove proQection as per our discussion on pureprice support and resistance levels fro! early last !onth.

F@=J>" 4 - 9< Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacci8.if


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Fibonacci levels are not li!ited to the retrace!ents within a trend !ove. They can alsoproQect price tarets and support and resistance levels and lay outside the scope of the trend!ove itself. For instance, if we look at the three wave trend lower into al!ost 5+;8 on the55th off the 55;8 "T hihs, then we can connect the hihs of that trend to the lows of thattrend !ove on this s!aller + !inute ti!e fra!e. @t retraced back into the 25.3A level beforecontinuin lower.



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#hen it broke lower into 58; "T 'as shown on Fiure 6(, you will see that it proceeded tothe next Fibonacci level. @n this case it was the -83.+A retrace!ent. This helped predict a

bounce off that price /one. The 9< then fell into a rane between the A and -83.+A

retrace!ent levels before trierin a third wave of sellin into 56;56 p! "T.


y steppin back a ti!e fra!e to the 6 !inute charts, once can !ore easily discern this newtrend. @t had three stron waves of sellin and then reversed into the close.

http://www.tradingfrommainstreet.com/classes/Fibonacci_5.gifhttp://www.tradingfrommainstreet.com/classes/Fibonacci_6.gifhttp://www.tradingfrommainstreet.com/classes/Fibonacci_5.gifhttp://www.tradingfrommainstreet.com/classes/Fibonacci_6.gif


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Followin that reversal, the first resistance it ran into was a co!bination of not only the priceconestion fro! !id-afternoon, but it hit the 83.+A fibonacci retrace!ent level on the head.#hen dealin with conestion /ones, it can be a little difficult knowin where in that /one the!ove will stall. y addin a fibonacci level, it can help narrow down the price a bit !oreaccurately. The second resistance level after the lows was also a price resistance level at the

prior hihs. This was the 5A fib retrace!ent. %fter prices reversed at that point, they fell

into the 25.3A level and held al!ost perfectly once aain. %ain, however, also note the pricesupport fro! the previous day. #henever you have these co!binations of support orresistance /ones, those levels are oin to have !ore strenth to the!. @f you wantconfidence, this is one way to build it. @f you cannot identify !ore than one reason for asupport or resistance level to hold, the chances are less that it actually will, or that it will toany sinificant deree.

F@=J>" 3 - "S Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacci7.if


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Fibonacci levels work for both intraday and all sessions ti!e fra!es in the co!!odities!arket. The ter! all sessions refers to trades takin place outside the G;8-52; "T ti!efra!e. @ actually didn$t et to sleep last niht because @ was tradin the "S at that ti!e. ;(

%fter catchin the 8; "T reversal, @ wanted a way to proQect price levels for support as the!ornin proressed. 0nowin @ had this class today, @ threw up the F@b levels for the "S

based upon that !ornin rally which bean at about +8; yesterday evenin.

F@=J>" G - "S Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacci3.if


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#hile not perfect, notice that each of the !aQor stallin points on the 8 !inute ti!e fra!e fellat a Fibonacci price /one. #hen the !arket fell apart at 7; a! "T it barely took a second tonotice the 5A retrace!ent level and dropped into the 583.+A instead. Since the !o!entu!was so extre!e, the exact prices surpassed the exact price of the fib level, but notice how itstill conested at it. This shows that despite the slihtly lower lows, it still reacted to that fib/one. The !arket then popped back into the 5A retrace!ent level and continued later on

into the 83.+A. nce aain the was on stroner !o!entu!. )eadin into the open it fell backinto the 5A and price support. This is at U6.

F@=J>" 5 - "S Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacciG.if


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%s tradin continued past the open, these fib levels fro! the wee hours of the !ornincontinued to hold. The resistance level @ ave early in the day at G;68 was based upon the 6Aretrace!ent, which co!bined with earlier price conestion. The support @ then posted at 5;4was a reflection of the 583.+A retrace!ent, as well as prior lows 'U5(.



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Since that !ove fro! around 8 a! to 7;8 a! broke hiher Qust prior to the open, another setof fib lines could be drawn, or adQusted, to fit the new trend. This trend off the lows waschoppier and only broke around 5; when it failed a new hih, !akin it a two-wave

correction !ove instead of three-wave uptrend. 9ou could use that !ove, however, to thenproQect lows at the 583.+A retrace!ent. So!e !ay have used the 3;8 a! low to the G; "Thih and Qust watched that !ore concise !ove. The /one of the 583.+A on that would have

been about the sa!e. 9ou would have had to have considered the fact that the !o!entu! wasvery sharp into the low, hence addin a bit !ore ive to it. The Fib levels drawn early in theday, however, continued throuhout the session.

F@=J>" 5+ - "S Fibonacci Support>esistancehttp;www.tradinfro!!ainstreet.co!classesFibonacci5a.if

)opefully, for those of you lookin to add a bit !ore assistance in identifyin sr levels, you

will find these fibonacci levels to be extre!ely helpful. There are other applications offibonacci in the !arketplace as well. So!e use the! for ti!e extensions to help identify how!uch loner it will be until another reversal. For this they will use a trend !ove, calculate theti!e of that trend !ove and proQect the fib levels out in ter!s of ti!e. *ucas nu!bers orlevels are another application of si!ilar principles of fibonacci that !any traders use. So, ifinclined to follow this line of study, these are two additional areas you !ay wish to explore.

@ will now open the roo! up for :uestions...

Qball; ood stuff

Toni; ty Qerrytrau!a; thanks Toni
http://www.tradingfrommainstreet.com/classes/Fibonacci_10a.gifhttp://www.tradingfrommainstreet.com/classes/Fibonacci_10a.gif


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billi; very helpfulcrack8+; what fibonacci retrace!ent do u need to buy !inolo$s on sale?Toni; lol

six; can Fibo levels be used to trade stocks intraday

Toni; 5+ yessix; thanks, Toni

)elena546; #hat fib level did we achieve today? ;(Toni; Qust a sec... i will show you ;( #e are at the -83.+A on the daily off that last trend!ove on the "S btw



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N&M durin


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with little apparent reason, and it does not fitthe !entality of the other ap types, it will likelybe a co!!on ap.

Do!!on aps are usually filled in :uite :uickly.Fillingin !eans the price reverses thedirection of the ap, if only te!porarily, and then resu!es tradin. ften, the aps are filled

the sa!e day.

Septe!ber 8rd, D< closed at I85.36. The !ornin of Septe!ber 4th had the price openinat I88.4. The price Qu!ped al!ost four percent overniht. ut the price slid durin the dayand closed threecents lower than the Septe!ber 8rd.

N&M &ommon Gap:up

T(e /,(austion Gap

%fter prices have been either trendin up or down for a while, the senti!ent !ay be nearinexhaustion.

@!aine a stock tradin downwards for a lon period of ti!e despite co!pany restructurinand i!prove!ent of the botto! line. %fter a lon while, the last of the weak hands finallyive up and sell off the re!ainder of their stock in despair. @t is :uickly bouht up by barainhunters or technical analysts, the price !ay find solid round and can reverse the trend.

Donversely, perhaps the stock has been cli!bin for so!e ti!e in an upwards trend. %seuphoria reaches an all ti!e hih, the price aps up. The last of the buyers co!e out of thewoodwork thinkin this is a sure bet as the current stock holders du!p their shares in reat:uantity. %fter this initial transfer and no new buyers, the price reverses direction.

*ook for these two re:uire!ents when tryin to decide if the ap is an exhaustion ap.

"xtre!ely hih volu!e 'perhaps +x the nor!al(

%fter a lon-ti!e trend has been in place

"xa!inin D< at an earlier date, we will exa!ine the blue area that shows a reversal fro! adowntrend to an uptrend.
http://www.stockwatch.com.au/articles/technical-analysis/charting/gap-analysis.aspxhttp://www.stockwatch.com.au/articles/technical-analysis/charting/gap-analysis.aspxhttp://www.stockwatch.com.au/articles/technical-analysis/charting/gap-analysis.aspxhttp://www.stockwatch.com.au/articles/technical-analysis/charting/gap-analysis.aspx


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N&M /,(austion Gap

ext we will /oo! in to look at the price ap and volu!e a little !ore closely.

N&M /,(austion Gap

ote the two blue circles. ne shows the ap on the char, the other shows the volu!e spikedurin those trades. ecause this occurs at the end of a very lon down-trend, we can assu!ethe price will fill and reverseHwhich it does.


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rea'away Gaps

This type of ap is considered a breakout. Prices will usually o throuh staes of trendin,then consolidation, and back to trendin aain. So!eti!es, after a consolidation pattern, orafter toyin with a support and resistance, prices will breakaway.

Prices break upwards or downward throuh support or resistance

olu!e increases

The trend usually continues

otice on the stock %** how the price consolidates. #hen the price finally Qu!ps down tobreak resistance, the volu!e also increases.

.88 rea'away Gap

$unaway or &ontinuation Gaps

The final class of ap is one that occurs in the !iddle of a trend.

Perhaps the stock is !ovin up at a !easured pace. Suddenly there is an increase of interest inthe stock and the price aps up and continues to trade in the for!er trend.

r the stock !ay be declinin over ti!e and there is an increased bearish senti!ent in thestock and the price aps downward and continues to trade lower.


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&ontinuation Gap

%s can be seen in DPJ.%O, the trend is in the !iddle of its !ove!ent when a couple of!inor aps occur with decent volu!e as the trend continues.

S(ould 5ou #lay t(e Gap@

There are nu!erous ways to play aps. So!e will day-trade the!, others will use the! assinals needin confir!ation for a reversal, fade the ap, and so on. Still others will shy awayfro! the! altoether since such a drastic chane in price can have lare repercussions if theinvestor plays the ap wron.

@f you are interested in profitin fro! aps, you will first need to et very proficient at tellinone fro! another.

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Gap Trading