CharlieShort – Thanks for the analysis and pointing out the gaps in the MOY share price moves. In the past I haven’t paid much attention to gaps. I’ve received various conflicting recommendations re how to view gaps, from “all gaps are filled” to “bullish gaps are great trade entries”. All a bit confusing, but lucky for me my stop at 21.5c is at the bottom of the last gap. My stops are “soft stops” as well in that I don’t have a contingent sell order sitting on my trading platform ready to execute when 21.5c is hit. I use my soft stop to determine my position size based on the risk I’m willing to ware. I then reduce the position size again depending on my general gut feeling about the stock.
Well I decided this afternoon to do my own research re gaps and specifically the MOY SP gaps. This has resulted in an important addition to my “Small Cap and Speculative Stock Trading Plan”. For those who are interested in gaps I thought I’d share what I have learnt in the following. This turned out rather lengthy so if you’re not interested in technical analysis stop reading now.
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Most gaps are the result of buying or selling interest developing while the market is closed, and are considered significant when they occur with higher than average volume. The four major gap types are:
Common Gaps – Usually are uneventful and get filled quickly. They appear in a trading range or congestion area and are usually associated with low volume indicating an apparent lack of interest in the stock.
Breakaway Gaps – Occur when price action is breaking out of a trading range or congestion area or some sort of chart pattern, e.g. ascending triangle. Volume should increase significantly. Can indicate a new trend and if associated with good volume the gap may not be filled quickly if at all.
Runaway Gaps –Occur in an existing trend caused by increased interest in the stock. Traders who may have been waiting for a pullback worry that they may miss out and panic buy. There is significant volume increase during and after the gap.
Exhaustion Gaps – Occur at the end of a good up or down trend, and are associated with high volume. They are quickly filled as prices reverse their trend.
(Ref: stockcharts.com “Gaps and Gap Analysis”)
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I had a look at the latest MOY chart (see below) and was able to identify what I saw as the breakout level 22c and managed to identify an ascending triangle pattern. Hence the two gaps, the first at 29/01 and the second at 15/02 both to me initially seemed to be Breakaway Gaps, i.e. both associated with very high volume and both resulting in a close above the most recent and the pattern high. The 29/01 gap failed so I guess it was really an Exhaustion Gap. The 15/02 gap hasn’t failed, but will it be filled?
Having hopefully identified the type of gap my next question was what were the price and volume signals that could be used to get an idea of the type of gap occurring at the time it was occurring. The only differences I could see were that the 29/01 breakout bar was of low spread while the 15/02 bar is higher than average spread. Both were on higher than average volume. The 29/02 breakout was also associated with a Quarterly Activities Report which was considered to be a GOOD report!
Many years ago I invested in VSA (Volume Spread Analysis) training and purchased the VSA Tradeguider EOD software. I don’t use it on a regular basis but thought I’d have a look at the MOY chart using VSA. A simple VSA chart is shown below.
I’ve marked the two gaps under consideration as “A” and “B”. The VSA indicators on the chart are the red and green triangles above and below the bars. The red ones are signs of weakness (SOW) and the green ones are signs of strength (SOS). There are lots of different types of each and by clicking on an indicator triangle a window describing the SOW/S pops up with detailed description etc. These are copyrighted and hence I haven’t shown them on the chart. The SOWs at A are identified as an “END OF RISING MARKET” and the advice given is to expect prices to reverse. The next green SOS on 06/02 is “STRENGTH COMINING IN” and the next two red SOW’s on the second gap day at “B” are both “SUPPLY COMING IN”. The advice provided at B is that this could also be a Breakout but wait for supply to be tested. The following green SOS is a successful “TEST” of supply.
Actually I was very surprised at how well the VSA indicators worked on the MOY chart. As to whether the recent gap is filled in the short term or not, I don’t know! All I can say is that I followed my trading plan in that I identified the breakout and then waited for a setup trigger which for me was a stochastic cross. Luckily the trade is also consistent with my now updated trade plan in that the breakout gap was identified as “supply coming in” and that supply was successfully tested prior to the stochastic cross.
What I’ve added to my trading plan is the need for an assessment of price volume action using VSA principles whenever a gap breakout occurs. And when the gap breakout is a high volume narrow spread bar on a good news announcement be prepared for at least a short term trend change, i.e. expect the gap to be filled quickly. The rationale behind this is the Smart Money are actively selling into the breakout hence the narrow spread.
So much for the TA. I hope this helps anyone interested in gaps. Lets hope the MOY SP goes up from here.
Safe trading everyone.
