15 - TYPES OF GAP

Types of gaps:
1) common gap
2) break away gap
3) run away gap
4) exhaustion gap


Common Gap
Characteristics:
-is not supported by high volume.
-the gap is closed very soon, around 1 week.

Fig. 29

Break Away Gap

Break Away Gap UpCharacteristics:
-is supported by high volume.
-indicates bullish.
-usually the gap is not closed.
-usually the gap penetrate importance level.

fig. 30

Break Away Gap Down

Characteristics:

-is supported by high volume.

-indicates bearish.

-usually the gap is not closed.

-usually the gap penetrate importance level.

fig. 31

Run Away Gap


Run Away Gap Up

Characteristics:

-is supported by high volume.

-indicates bullish.

-basically, it begins with a trend.

-it indicates more intensity on the trend.

Run Away Gap Down

Characteristics:

-is supported by high volume.

-indicates bearish.

-basically, it begins with a trend.

-it indicates more intensity on the trend.

Fig. 32

Exhaustion Gap
The gap is exhausted usually after a long rally or near the top of a trend.

Fig. 33

Examples:

Fig. 34 Common Gap

Fig. 35 Exhaustion Gap

Fig. 36 Break Away Gap

Fig. 37 Run Away Gap

14 - GAP

What Does Gap Mean?
A break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release. (investopedia)

fig. 26A

How can we tell if the gap was closed?
See fig. 26B.

fig. 26B

Another example:

Fig. 27A

Fig. 27B

Another example:

Fig. 28A

Fig. 28B

In the next chapter, we will discuss type of gaps.

13 - VOLUME

Volume is also important indicator besides price.
Volume indicates transaction that is happening during trading hour.
With volume, we can also determine the intensity of the stocks.


Basically, volume is recorded in bar in chart or we call it volume bar.
In chart, it is located below the price.


For example:

Fig. 25A

Fig. 25B

High volume bar means high interest of investors.

Low volume bar means low interest of investors.

High volume during trading day doesn't means more buyer than seller.

This is totally wrong.

Even though the volume is high during trading day, buyers and sellers always equal.

In addition, volume indicates the liquidity of one stock.

In the US market, one stock is liquid if the average daily transaction at least 500.000 shares.

What if we buy a stock that is not liquid?

We will find it hard to sell the stock because of the less interest of the buyers.

In this case, we see from the spread of bid and ask.

Example of the not liquid stock (Fig. 25C):

Fig. 25C

Compare it with this liquid stock (Fig. 25D):

Fig. 25D

Here's the relationship between price and volume:

1) price up & volume up = bullish

2) price up & volume down = bearish

3) price down & volume down = bullish

4) price down & volume up = bearish

Another relationship of price and volume:

If volume high, but the price is just going sideways, this indicates accumulation or distribution.

12 - MORE ON TRENDLINE

Trendline can be re-drawn.

See the charts below, they are the step by step trendlines re-drawn.

Fig. 23 is an example for uptrend.

fig. 23A

fig. 23B

fig. 23C

fig. 23D

Fig. 24 is an example for downtrend.

fig. 24A

fig. 24B

fig. 24C

fig. 24D

11 - FALSE BREAKOUT (WHIPSAW)

False breakout or whipsaw means a condition of price movement through an identified level of support or resistance that does not have enough momentum to maintain its direction. Since the validity of the breakout (or breakdown) is compromised, many traders close their positions and the price fails to make the sharp move that many were expecting. 


A failed break is also commonly referred to as a "false breakout". (from investopedia)

fig. 21

fig. 22

10 - PSYCHOLOGICAL LEVEL

Pyschological level is a level that has rounded off numbers. For example, 10, 20, 50, 100, 250, 500, 1000, 10000 and so on.


Sometimes it is called support psychological level or resistance psychological level.

fig. 19

fig. 20

Tips: It is better to buy above psychological level a little bit because the bid volume at psychological level usually very excessive. So, it is hard to get the stock at that level. On the other hand, it is better to sell below psychological level a little bit because the offer volume at psychological level usually very excessive. So, it is hard to sell the stock at that level.

9 - PULLBACK (RETRACE)

After strong a stock going up or down for some days, basically stock will fall back.
That condition is called pullback or retrace.


So, pullback or retrace means a falling back of a price from its high or low.

fig. 16

More examples on the stock chart:

fig. 17

fig. 18

8 - SUPPORT & RESISTANCE

Support line is a level where price indicates to go up because buyer (demand) is greater than seller (supply).

fig. 12

While resistance line is a level where price indicates to fall down because buyer (demand) is less than seller (supply).

fig. 13

Support and resistance represent key junctures where the forces of supply and demand meet. In the financial markets, prices are driven by excessive supply (down) and demand (up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with bullish, bulls and buying. These terms are used interchangeably throughout this and other articles. As demand increases, prices advance and as supply increases, prices decline. When supply and demand are equal, prices move sideways as bulls and bears slug it out for control. (from stockcharts)

fig. 14

How to determine support line?
Support line can be drawn horizontally with the previous lows.

How to determine resistance line?
Resistance line can be drawn horizontally with the previous highs.

fig. 15

7 - TREND - UPTREND, DOWNTREND, SIDEWAYS

Definition of trend:
The general direction of a market or of the price of an asset (from investopedia).


There are three type of trends:
- Uptrend (see fig. 8)
- Downtrend (see fig. 9)
- Sideways or trendless (see fig. 10)

fig. 8

fig. 9

fig. 10

Here is how to determine the trend:
- uptrend: connect the low to high, high to higher low, higher low to higher high, higher high to higher low and so on (see fig. 11A)
- downtrend: connect the low to high, high to lower low, lower low to lower high, lower high to lower low and so on (see fig. 11B)
- sideways / trendless: connect the low to high, high to equal low, equal low to equal high (see fig. 11C)

fig. 11A, 11B, 11C

6 - TIME FRAME (TIME PERIOD)

During the analyzing, we have to consider which time frame that we are going to use.

Here are list of the time frame (see fig. 7):

- 1 minute: it's called one minute chart

- 5 minutes: it's called five minutes chart

- 60 minutes or 1 hour: it's called hourly chart

- 1 day: it's called daily chart

- 1 week: it's called weekly chart

- 1 month: it's called monthly chart

- 1 year: it's called yearly chart

fig. 7

Daily chart is the most common one that analyst use.

Time frame is divided into:

- Short term: less than 1 month

- Medium term: 1 month to 6 months

- Long term: more han 6 months

So, what's the different between all of those time frame and which one to use for the analyzing?

In the shorter time frame, the entry signal and exit signal will come sooner than the longer time frame.

If we are going to trade for a short term, then we will use no longer than daily chart.

If we are going to invest for a mid term to long term, then we will use weekly and monthly chart.

In conclusion, there is no the best time frame chart to use.

Every time frame has its own benefit.

5 - CANDLESTICK CHART CONSTRUCTION

The highest price and the lowest price is connected with a vertical line between the opening price and the closing price (see fig. 6).

Candlestick chart is powerful tool for giving entry and exit signals.

Every pattern has it's own name and a story to tell between the war of demand and supply.

A short story of candlestick chart:

It was founded by the Japanese, called Munehisa Homma during rice trading in the early 16th century.

He dominated the market on those days.

Then, in 1990, candlestick chart was introduced by Steve Nison to the Western.

fig. 6

4 - BAR CHART CONSTRUCTION

The opening price is always on the left, while the closing price is always on the right.
The highest price and the lowest price is connected with a vertical line between the opening price and the closing price (see fig. 5).

fig. 5

3 - CHART INTRODUCTION - part 2

There are three most common charts:

1. Line chart (see fig. 2)

The construction of line chart: is connecting every closing price.

fig. 2

2. Candlestick chart (see fig. 3)

Every bar chart consists of 4 prices.

They are: opening price, highest price, lowest price and closing price.

For you information, candlestick chart has many patterns.
Every pattern tells the story of demand versus supply or buyer versus seller.

fig. 3

2. Bar chart (see fig. 3)

The construction of bar chart is just the same as the candlestick's chart. 

Every bar chart consists of 4 prices.

They are: opening price, highest price, lowest price and closing price.

The different is in the pattern.

fig 4

2 - CHART INTRODUCTION

fig. 1

fig. 1B

Definiton of chart: 

is a graphic that consist of the historical data from time to time.

A chart consists of major trend, secondary trend and minor trend (see fig. 1 and fig. 1B).

It is the most primary tool.