Investment Strategy

San-Ku  – Three Gaps Up 


As mentioned in Japanese candlestick analys is, the num ber three plays a very relevant

part of the investment doctrine. Many of the  signals and formations consist of a group of

three individual signals. It has becom e a  deeply rooted num ber for the Japanese

investment com munity whether applied to Ca ndlestick analysis or not. This creates a

highly profitable investment strategy when applied to Gaps or Windows.


San-ku provides the best opportunities for buyi ng and selling at the optim al points in

time. After observing the bottom ing signals, the  first gap (ku) indicates that the buyers

have entered the position with force. The s econd gap indicates further enthusiasm  for

getting into a stock position. This should have  a mixture of short covering involved. The

third gap is the result of  the bears f inally realizing that this is too f orceful for them to

keep holding short positions, they cover al ong with the later buyers. Upon seeing the

third gap up, the Japanese recom mend that th e position be closed out, take the profits.

This is due to the price having probabl y reached the overbought area well before it

should. The presence of three gaps up probably has resulted in very good profits over a

very short period. The same parameters will occur in the opposite direction, in a declining

price move.


Note in Figure 22 – URI, United Rental Inc., how the first gap demonstrated that the

reversal picked up a lot of strength, buyers gapped up the price and it closed at a high for

many months. A few more days of buyers showed that the price was not going to back

off. This led to another gap up, probably the shorts deciding that the trend is now firmly

against them. After a couple of more days of no real weakness, the price gapped up again.

Panic short covering? Also the Japanese rule suggests, sell after the third gap up. In this

case, selling on the close of the third gap up day would have gotten you most of the gains

possible from this trade. There was a day or two that you could have gotten a few

percentage gains more, but why risk it? The Japanese have watched these moves for

hundreds of years. Why try to squeak out a few more percentage points profit? 28% in

the couple of weeks should be plush enough. Go on and find another trade that is starting

at the bottom.

Figure 22 – United Rental Inc. 



The same dynamics can be seen in the Inge rsoll-Rand Ltd. Chart. In Figure 23, the first

gap broke out prices above the recent hi gh, the second gap still shows strong buying and

the close of the third gap up day is as good a spot to take profits as any.


Figure 23 – Ingersoll-Rand Ltd. 


One more illustration shows the factors at work in a San-ku formation. Note in the

Maytag Corp. stock price in Figure 24, the initial gap up should have prepared the

Candlestick investor for the possibility of the exhaustion gap. However, this stock price

opened and steadily moved higher, not affecting any stops. As it closed near its high for

the day, a white Maruboza, a bullish continuation pattern, should have now alerted the

Candlestick investor that the buyers were still around in force. The second gap up now

makes the investor aware that a San-ku may be in the making. As evidenced in the last

two examples, selling after the third gap up, although more lengthy a period than the

previous examples, would have captured a great majority of the potential of this move.


Figure 24 – Maytag Corp. 




Having the knowledge of what should occur after gaps provides that extra advantage.

Most investors are leery of gaps because th ey don’t understand all the ram ifications gaps

introduce. This allows the Candlestick invest or to exploit m arket m oves because the

majority of the investment community does not understand how to use them . The San-ku

formation can get investors in when m any investors would be afraid to chase a gap up or

gap down. It also gets the Candlestick invest or out at the appropriate tim e where other

investors would hold too long and not get the best return on investment.




As revealing as the gaps are for alerting when  a major run-up is about to occur, it is even

more beneficial to know when the gap is a bout ready to occur. There are particular

patterns that forewarn when a gap is likely to occur. And when they do, it m eans that a

whole new trading area is going to be reach ed. Having this forewarning perm its the

investor to be ready to get into the trade at the optim al time and have the funds available

to take advantage of the profitable move that it initiates.


Note how the gap up at a level that had not been breached for a couple of months now

indicates the buyers not being apprehensive about buying above the past highs. This

easily reveals that the price is going to new levels.


Notice the breakout in Figure 25 – DCN, Dana Corp.  DCN starts its major run once it

broke out of a trading range over the past two months. The gap is the alert. The gap up at

this important level is a profitable transaction. In this example, volume had a great

increase once the new trading levels were reached. Stochastics stayed up near the

overbought range but they do indicate that they are pointing up when this new move

starts. The protective stops, placed on a gap up day near the highs, would not have been

affected with the price continuing higher.


Figure 25 – Dana Corp.  

The Prepaid Legal chart, Figure 26, is a chart that one could anticipate a gap occurring.

The best entry level was the confirmed Inverted Hammer pattern with volume

dramatically increasing over the next few days. As the price came back up towards the

trading area of $22.00, it was feasible that if the price broke that level, it could head much

higher. The appearance of the gap should have been an immediate indication that buying

was coming into the stock. The long bullish candle would have revealed that the old

trading levels were now being disregarded, new buying dynamics were in the stock price.


Figure 27 – Cooper Tire Company   


Despite the very small gap in the price rise of Cooper Tire’s stock move, it still indicated

strong buying even after a strong up day. The fact that the buying after the gap up took

prices to new highs would have alerted the Candlestick investor that a new level should

be reached.


All of the above examples had chart set-ups that would leave room for anticipating that a

gap up could occur. All illustrate that when a gap up is noticed, new buying strength is

involved, moving prices up to much higher prices.


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