Selling Gaps

Now turn the tables over.  The same enthusiasm demonstrated by a gap to the upside is 

just as pertinent for sellers on the downside. A gap down illustrates the desire for

investors to get out of a stock very quickly.  Identifying clear Candlestick “sell” signals

prepares the investor for potential reversals. The Doji at the top, Dark Clouds, Bearish

Engulfing patterns are obvious signals to be prepared for further downmoves. The Doji is

the best signal to witness a trend reversal.


The Doji should stand out at the top of a trend just like a blinking billboard. Note the Doji

at the top of the ISSI, Integrated Silicon Solution chart, Figure 13. The Candlestick

investor would have already been prepared upon seeing that a Doji was forming that day

as the close was getting near. At worst, the position should have been liquidated when the

pre-market indications showed a weak open.


Figure 13 – Integrated Silicon Solutions  


The existence of the gap down demonstrates an urgency to get out of this position. Being

prepared for this event prevented giving back a major portion of profits.


Illustrated in the ASTSF chart, Ase Test Limited Ord Shr, Figure 14, the gap down

confirms the downtrend a day later after the appearance of the Doji. A clear Evening Star

signal requires the black candle after the Doji to close more than half-way down the

previous large white candle. In this case, it closed right at the midpoint, still leaving some

doubt as to whether the uptrend is truly over. The gap down the following day confirms

that the sellers are now in control.


Knowing the simple description of the signals gives the candlestick investor that extra

head start in preparing to take profits or go short.  Utilizing the statistical probabilities of

what the signals convey allows the mental, as well as the actual preparedness. The ease of

identifying a gap, and knowing what messages a gap conveys, instigates the investor to

change the position status immediately.



Figure 14 – Ace Test Limited Ord. Shrs. 

These are examples that demonstrate the obvious benefits of what the windows /gaps

portray. However, there are many more situations where they provide important

investment decision-making aspects.


For example, review the Toll Brothers chart, Figure 15, April of 1999. Notice how the

initial gap acted as a support level. In the weeks after the gap up the price would come

back to the top of the gap but would not close lower. As long as the gap was not filled,

the uptrend stayed intact. This is a good rule of thumb. If a gap cannot be filled, the

predominant trend will continue. The Japanese term for filling a gap is anaume.

Knowing that a gap will act as a support or resistance level gives the Candlestick investor

time to prepare when one of these levels is approached. The condition of the Stochastics

and the potential set up of another reversal signal informs the investor as to whether that

gap is going to act as a support or if the gap will be filled. This may be occurring at a

time when no other technical indicators are present in that price area. Note how the gap

acts as a support level in the Toll Brothers chart. Each time price dipped to this level, the

buyers stepped in and would not let the price fill the gap. This should obviously become a

support consideration.


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