Tuesday, April 22, 2008

Price Gaps

When looking at a price chart of a stock market index like the Nasdaq, there are places where the price of one day is separated from the next day's prices by a space which is called a "gap." Most often prices will eventually "fill" the gap on the chart. There is a very strong tendency for gaps to be filled in most market conditions. After the gap gets filled, the prevailing larger trend usually continues. So, these gaps provide good price targets to look to initiate a new trade/purchase, if it confirms a short term extreme from a contrarian perspective.

Last week there were two gaps created on the chart. I expect that at least the most recent gap will be filled before a strong price move upward. That still leaves approximately a 1% further decline before the gap is filled. At that point, I think it would be likely that we hit a short-term extreme in pessimism and I will look for a new entry into QLD.

2340 is the Nasdaq level to watch for this recent gap. 2286 is the support from the prior gap, which may possibly get filled as well.

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