Technical Analysis of Gaps: Identifying Profitable Gaps for Trading

In Technical Analysis of Gaps, renowned technical analysis researchers Julie Dahlquist and Richard Bauer change all that. Drawing on 60 years of comprehensive data, they demonstrate how to sort “strategic” gaps from trivial ones, and successfully trade on gaps identified as significant. Building on work that recently earned them the Market Technicians Association’s 2011 Charles H. Dow Award for creativity and innovation in technical analysis, Dahlquist and Bauer offer specific gap-related trading tips for stocks, futures, and options.

Introduction:

We first started looking at gaps because they provide useful illustrations when teaching our students how to read stock charts. Students hear a news report that their favorite company just reported earnings, that a company is being sued, or that a well-known company, such as Apple, is launching a new product and ask how these events will affect the price of the stock of the company. These news events often trigger sizeable price moves, frequently on a gap. We can introduce the concept of a gap easily and quickly and then use the conversation as a jumping-off point for broader discussion of the tools of technical analysis.

Gaps repeatedly come up during small talk when people find out that we have a background in technical analysis. Even individuals who know little about the stock market seem to have heard the adage “the gap is always filled.” The two technical analysis terms that people seem to latch on to are “head and shoulders” and “gaps.” After engaging in a number of these conversations, we thought it would be interesting to pursue this topic a bit more.

Gaps seem to have captured the attention of the earliest technical analysts, but we found surprisingly little systematic study of gaps. Much of the recent work in the area of technical analysis has been based on complex mathematical models. We thought it would be a fun and interesting endeavor to investigate one of the simple, basic ideas of technical analysis in more depth. Thus, a couple of years ago we began our inquiry.

Contents:

• What Are Gaps?
• Windows on Candlestick Charts
• The Occurrence of Gaps
• How to Measure Returns
• Gaps and Previous Price Movement
• Gaps and Volume
• Gaps and Moving Averages
• Gaps and the Market
• Closing the Gap
• Putting It All Together

Technical Analysis of Gaps: Identifying Profitable Gaps for Trading By Julie A. Dahlquist and Richard J. Bauer pdf