Here is another installment in this multi-part series on technical analysis and specifically reading stock charts for day trading. However, it is not limited to day trading. Short-term investors and swing traders can certainly benefit from gap and window strategies as we will talk a bit about daily charts.
Now, let me remind you that these levels are critical, and they work well because many traders respect this language of technical analysis. It is because of this that you are learning this language since technical analysis shows clear buy and sell signals within charts. In other words, if you’re not catching them, you may miss opportunities as well as position yourself to jump into a sell signal without realizing it, and you may lose money.
Let’s start by talking about how the gap is created. As a result, gaps are very common on daily stock charts and their formation, and I’ll switch to the whiteboard now for a day of stock trading. I’m just going to draw a bunch of days here. Let’s pretend that these are regular candles. After that, the stock opens here after terrible news the next day. This is the distance on the chart between these two points.
Technically, every one of these levels is a gap if it opens higher than the day before. In other words, a gap is when I open higher or lower than yesterday. You can have stocks that gap up, or you can have stocks that gap down, but what happens on the daily chart during the gap, and you can see here is an example of a chart with a blue highlight during the gap. , gap down, that’s a lot of space.
As far as I am concerned, a gap like this represents an area where there is literally no resistance and no support, since it breaks down the entire region. Hence, gap filling is our strategy. As we see a stock come back and then go down, our gap filling strategy is to look at the potential area from here to here. Filling this gap is the best way to go. Once it breaks into the gap, there won’t be a technical level resistance here until the 200 moving average crosses over in the middle, unless a level like the 200 moving average does. Those are the first levels of resistance at 200, if you have them. Once you get past that, there is a space up to here and you can park for free.
On the daily chart, these are the gaps. It is extremely common for gaps to occur. The difference now is that we have something called Windows. Let’s see, there’s a window on the daily chart when we have, so we’ll go ahead and do this. Hence, we will do a couple of candles here and a couple of candles there. The first one will be coming down, and then there will be two more here. Okay, so if this stock starts to rise, there is no gap right here. Instead, there is a window from here to here.
In this case, a very long candle forms the window. The field is free of both resistance and support once you are there. In saying that, I hesitate for a second because it’s still possible, on a daily chart, that if you look at the candle at five minutes intraday, there might be a candle within the candle that’s turning. There might be a high level of support halfway before that.
Coming back to the daily chart, it appears that there is room to increase all the way to this level. You can see potential resistance here if you examine it at the five-minute level, on the five-minute timeframe. Similarly, we may also encounter a moving average problem here, something like this, that produces resistance in this area, similar to the previous example.
Taking a look at the chart, you can see that even though there is a big gap here, there is a 200 moving average of 6.52 here, and there is another moving average here, another one here, and another one here. Here’s another. Due to this, the chart actually ends up being less impressive than the chart because the resistance has been created. In spite of the gap, you don’t have a very good chart.
Here is another chart with a gap. The market opened high. It is the actual space where there has never been any price action that I draw as my gap. It’s common for people to draw close to the open, but I wouldn’t because there is a low and a high here. Therefore, I consider this blue area to be the real distance. As soon as this stock starts moving down, we’ll see if it breaks this low, since there’s no support down here, giving you a bit of a free pull potential. The price of stocks can drop very rapidly. Alternatively, if we are trading on the long side, we are looking for stocks that come back from here, for example, if the stock can go above this level, it means the stock can only move quickly.
By watching this multi-part technical analysis episode or series, you already know what gaps and windows are, upswings and downswings, and horizontal support and resistance lines are. Additionally, you know how to identify multi-candlestick patterns, such as ABC patterns, flat top breakouts, and bull flags. We can only start to form a strong bias on a stock when we combine all these different elements into technical analysis. It is these reasons we are bullish and why we like it that are also the reasons why we are not bullish.
It should be noted that this type of analysis really only applies to stocks experiencing high levels of relative volume. Breaking news usually causes this. In general, a stock that is really popular is one of the best profit makers on the day you are trading. Stocks that respond most clearly to significant levels are those that will respond most clearly to significant levels.
Low relative volume stocks do not actually trade very clearly around these levels. There is a possibility that it won’t even fit into the gap. There is a possibility that it may come to that and then fade away. The momentum behind it isn’t really there to make it into this tier. Then you see, “Oh, we have gap fill potential,” but if that kind of analysis is applied to the wrong stocks, there is no guarantee that that potential will be realized.
