philosophically, you could say nature abhors a vacuum.
geometrically, a hole in the candlesticks demonstrates a weakness of sorts. there was no obvious buying pressure of significant volume before the gap up, which pretty much translates to a sudden rush of impulse buys by short term investors hoping to trade a spike. more often than not, in the absence of any further momentum, these impulse buyers will begin to re-evaluate their decision, and are just as likely sell on an impulse.
so once the holders who are in profit from the spike begin to sell the "top", the chart swings back down. as the SP approaches the gap, the impulsive holders who were responsible for bidding the gap up will panic and sell the gap closed in an effort to preserve their capital.
likewise, once a gap closes, the support from cooler heads and those who took profits will prevail as they buy the stock back at discount levels.
this is also exacerbated by the self fulfilling effect of technical traders anticipating a gap closure.
when people talk of breakaway gaps and gaps not needing filling, they are really referring to a genuine revaluation taking place. obviously there are no dominant weaker hands forcing the movements in such a scenario, as the volume and tide of the buying becomes a greater force than the weakness of the impulse buyers.
gap downs are similar, in that when a stock collapses, and slowly rebuilds itself to pregap levels, those burnt holders who got left carrying the baby, so to speak, will exit with relief once they recoup their losses, forming resistance of sorts.
all if this, of course, is just in my imagination, much like gravity...:)
RHM Price at posting:
28.0¢ Sentiment: Buy Disclosure: Held
