By: Martha Stokes C.M.T.
Last week we studied KORS which had a gap at that time. This was not only a breakaway gap but it was also an island continuation gap which is a very strong confirmation of the upside action.
The island continuation gap occurs when a stock gaps up often a breakaway gap, then moves sideways for several weeks to several months and then gaps up again.
To be a true breakaway gap, the price must start in a consolidation or sideways pattern and must be below a resistance level. The breakaway gap itself, moves above and beyond the resistance and is that is why it is called a breakaway gap. It breaks away from the resistance to either continue a move upward or reverse a move.
The island gap is a very strong move because it confirms the upside action after a lengthy sideways pattern. See the KORS chart below:
Chart 1
Continuation upside gaps tend to occur mostly during platform market conditions when the market is moving sideways for long periods of time often for entire quarters, then it moves up on earning s news. This is a value- oriented market rather than a speculative market.
The continuation island gap can occur several times during a long term run.
It is important that you are able to recognize instantly the different kinds of gaps as some fill completely, some partially, and some do not fill at all.
By understanding which gap has formed you are better prepared for what price will do over the next few days. Island continuation gaps seldom fill as most of the time they are also breakaway gaps which seldom fill. The energy behind the move up tends to continue over the next few days rather than shifting to a correction.
Below is an entirely different kind of gap in the VC chart. What type of gap is this? Will it fill or will the stock continue moving upward? What market participant caused this gap?
Chart 2
Summary: We are going to see plenty of gaps this fall as the energy of the market increases due to more market participants trading and investing in the stock market. Already we have seen a surge of mutual fund investors buying mutual funds which allows these funds to buy more stocks. This has been occurring over the summer when most retail traders are assuming the markets are not doing much since they follow the indexes rather than tracking the institutions.
Therefore being able to identify not only what gap formed but when a gap is likely form due to quiet accumulation patterns prior to an event.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
©2012 Decisions Unlimited, Inc.
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