As always, there are exceptions to all rules. The Gapping Plays are those exceptions. As
previously discussed, the gap at the top of a trend is the exhaustion gap. The same is said
for the gap at the bottom of a trend. The appearance of those gaps is either the last gasp
exhilaration (at the top) or the last gasp panic (at the bottom). However, the Gapping
Plays represent a different set of circumstances at the top or bottom.
After a strong run up, it is not unusual to see a price back off and consolidate before the
next leg up in a rally. This could be in the form of a back off in price or a backing off
from further advance. The latter is a period of the price trading flat at the high end of the
previous uptrend. After the flat trading period, a new burst of buying, causing a gap up,
illustrates that the buyers have not been discouraged. This new buying is evident by the
gap up. As a gap expresses enthusiasm, this is usually the reinstatement of the previous
move, taking prices up to a new level.
As seen in Figure 16 – ITG, Investment Technology, the gap up after prices had stayed
flat and at the top end of the last large white candle, for about a month and a half, finally
convinced buyers that the sellers were not around. The gap up should have alerted the
Candlestick investor that prices should be moving up to a new level. This becomes a
High Level Gapping Play.
Figure 16 – Investment Technology
The same is true for a declining trend. After a significant downtrend, prices level out.
Once the sellers are convinced that there are no buyers around to move the price up, they
can sell again with confidence. This confidence is seen in the gapping down of price. At
that point, much lower prices can be expected.
As seen in Figure 17 – PCSA, Airgate PCS, after the price dropped dramatically, the
buyers and sellers have a few days of indecision. The prices remain flat for three or four
days. But after the sellers realize that the buyers are not strong enough to get the prices to
move back up, they get out with force. This is known as a Low Price Gapping Play.
Dumpling Tops and Fry Pan Bottoms
Sometimes a gap or window is required to demonstrate that the price move is picking up
steam. Otherwise, the move may not create any signs that a move is forming. The best
illustration is the Dumpling Top. The slow curvature of the top would not attract any
attention. However, being prepared for a gap down allows the investor to make profits
that otherwise would just blend into the trend with no great expediency needed.
Figure 18 illustrates the Dumpling Top. The Gap is the crucial sign in this pattern. Once
the gap occurs, the downtrend should prevail for a number of days. Prior to the gap, there
is so little price volatility, nobody would be interested in what was occurring in this
stock. The Candlestick investor gets a forewarning of a profitable trade.
Figure 18 – Dumpling Top.
Note in Figure 19 – CMH, Clayton Homes, Inc., that the trading became listless until the
gap down instigated a sell off.
Figure 19 – Clayton Homes, Inc.
Just as the gap down is the main initiative for expecting the downtrend after the
Dumpling Top, the same is true for expecting an up-move after a Fry Pan Bottom. The
Fry Pan Bottom gets its name from the slow gradual curve made at the bottom of a trend.
This provides a lot of time for the sentiment to change from bearish back to bullish.
Figure 20 – Fry Pan Bottom.
As the change becom es more bullish, the bulls f eel more confident that all the selling is
gone. This leads to some exuberance into getting back into the position. Upon witnessing
this gap up, the Candlestick investor should be willing to com mit funds as fast as
possible. It usually signifies the beginning of a new trend.
Note in the New Focus Inc. chart, Figure 21, how the bottom slowly curved back up as
the selling diminished and the buyers began to build confidence. The sm all gap up on the
ascending side of the Fry Pan alerts the i nvestor that the buying is now getting m ore
enthusiastic. This is the spot that a Candles tick investor wants to com mit funds to grab
some of the 100% gain over the next few weeks.
Having the foresight that the slow curving moves are not just dull m arket conditions
creates an opportunity for the Candlestick invest or to be ready for that telltale gap. Once
the gap appears, putting money into that trade maximizes the returns by being in the trade
as it is now moving.
Figure 21 – New Focus Inc.
As witnessed in both the Dum pling Top and the Fry Pan Bottom, the gap is the alert that
the trend has started, and started with m ore force behind it than what had been witnessed
prior to the gap. Having the foresight to r ecognize the forming of a Dumpling Top and a
Fry Pan Bottom creates the opportunity to ge t into a position that is able to produce
profits immediately. The appearance of the gap is the best spot to exploit the new strength
in a move.