made on July 5 in this chart was a typical BreakawayGap, occurring as prices broke out of the complex base for the July–August SecondaryRecovery. (Compare this chart with Figure 32 on page 84.) Another type of BreakawayGap — through a trendline — occurred on August 26. That of September 7 wasprimarily due to the “ex-dividend,” while that of September 18 was still another typeof breakaway — through a Support Level.The first gap marked, on April 26, must be classified as a Runaway. It made a sortof “Island” of the whole April/June complex base.
What forecasting value can we ascribe to them? First, they serve to callattention to, and emphasize the fact of, a breakout. There can be little doubtthat a genuine breakout has eventuated when prices jump out of a patternwith a conspicuous gap. False moves are seldom attended by gaps. Second,they carry the suggestion that the buying demand (or selling pressure, asthe case may be) that produced the gap is stronger than would be indicatedby a gapless breakout. Hence, it may be inferred that the ensuing move willcarry prices farther or faster, or both. It does not do to make too much ofthis point; it is a logical inference and one which has been borne out in the
AU3772_book.fm Page 217 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
Gaps
217
2624ZENITH RADIO
ZE
1941–1943
222019181716151413121110G9
S
S
8Sales100’s500400300200100
H
S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
FIGURE 124. A potent Breakaway Gap that showed on Zenith’s weekly chart whenit broke out of a Head-and-Shoulders Bottom in early 1942. Note that high volumedeveloped beyond the gap, suggesting that it would not be quickly closed. The Aprilreaction stopped short of it. In fact, this gap had still not been closed in 1956, morethan 14 years later.
majority of cases, but it has its exceptions and may prove most disappointingon occasion. Nevertheless, other things being equal, of two stocks whichemerged from Ascending Triangles at the same time, we should choose tobuy the one that gapped out over the one that pushed its way out by smallfractional steps.
AU3772_book.fm Page 218 Saturday, November 18, 2006 5:29 PM
218
Technical Analysis of Stock Trends
ZENITH RADIO
ZE
40
30
20
10
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
FIGURE 125. As a matter of interest, this monthly chart of Zenith Radio is reproduced for comparison with the weekly chart on the preceding page. The Head-andShoulders Bottom is easily seen.
Except for the presumption of somewhat greater “steam” behind themove, the Breakaway Gap carries no particular measuring implication, norany other forecasting significance. The next question is: should we expect aBreakaway Gap to be closed within a relatively short time? Or, to put thequestion in more practical and pragmatic terms: should we defer buying inthe expectation that it will be closed before any worthwhile move develops?In order to give a fair answer to that question, it is necessary to scrutinizeclosely the volume of transactions before and after the gap. If a great manysales were recorded at the takeoff level from which prices jumped the gap,but relatively few as prices moved away from the far side of the gap, thenthere is a chance — perhaps about 50–50 — that the next Minor Reactionwill carry prices back to the edge of the pattern of origin, thus filling thegap. On the other hand, if high volume developed at the far side of the gap,and a great many transactions took place there as prices moved on awayfrom the gap, then the chances are remote that any near-term Throwbackwill close the gap. In such cases, a Throwback reaction is almost alwaysstopped at the outside of the gap.(One is constantly tempted in a work of this sort to employ the wordsalways or never without qualification. Unfortunately, the authors have neverbeen able to discover a rule of techniques to which the market did not, onrare occasion, produce an exception. It is always necessary to be on guardagainst such exceptional developments. Many of them are caused by general
AU3772_book.fm Page 219 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
Gaps
219
market conditions which counteract the technical trend in individual issues.Keep an eye on the charts of the “Averages,” as well as the particular issuesin which you are interested.)Where Breakaway Gaps develop intraday, the daily chart cannot, ofcourse, indicate how the day’s volume was distributed. In that event, it maybe necessary to examine the ticker tape or ask your broker to refer to thepublished record of individual transactions to which most brokerage firmssubscribe. EN: This data may now be easily obtained. See Appendix D, Resources.EN9: Candlestick charts, now much in use, will allow the analyst to see the intradaybreakaway gap. Lacking any clear-cut volume clue, it is safest to figure that aBreakaway Gap will not be filled until long after the full move implied bythe pattern of origin (usually a move of Intermediate Extent in the Dowsense) has been carried out.
Continuation or Runaway GapsLess frequent in their appearance than either of the two forms we havediscussed above, gaps of the Continuation or Runaway type are of far greatertechnical significance because they afford a rough indication of the probableextent of the move in which they occur. For that reason they have sometimesbeen called “Measuring” Gaps.Both the Common or Pattern Gap and the Breakout Gap develop inassociation with Price Formations of the Area or Congestion type, the formerwithin the formation and the latter as prices move out of it. The RunawayGap, on the other hand, as well as the Exhaustion Gap, which we will takeup later, is not associated with Area Patterns, but occurs in the course ofrapid, straight-line advances or declines.When a dynamic move starts from an area of accumulation, the upwardtrend of prices will seem often to gather “steam,” to accelerate for a fewdays, perhaps a week or more, and then begin to lose momentum as supplyincreases when the very extent of the advance invites more and more profittaking. Trading volume jumps to a peak on the initial breakout, tapers offsomewhat in the middle of the advance, and then leaps up again to a terrificturnover as the move is finally halted. In such moves — and in rapid declinesof corresponding character — a wide gap is quite likely to appear at the timewhen the Runaway is at its height, when quotations are moving most rapidlyand easily with relation to the volume of transactions. That period comesnormally at just about the halfway point between the breakout which inaugurated the move and the Reversal Day or Congestion Pattern which callsan end to it. Hence, a Continuation or Runaway Gap affords an approximatemeasurement of the move in which it develops. Its inference is that priceswill go as much farther beyond the gap as they already have gone between thebeginning of the move and the gap, as measured directly (and vertically) onthe chart.Since there is a tendency for advances to run, in terms of points, beyondthe price levels arithmetically implied by this rule, and for declines to be
AU3772_book.fm Page 220 Saturday, November 18, 2006 5:29 PM
220
Technical Analysis of Stock Trends
32
RD
BLAW – KNOX
BX
30G2826
G1946
24Sales100’s1251007550252
JUNEJULYMAYAPRILFEBRUARYMARCH9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27
FIGURE 126. The early 1946 daily chart of Blaw–Knox contained a number ofinteresting technical features. Its spurt from 19 to 25 in December 1945 was followedby a 9-week Rectangle Consolidation, the end of which appears on the chart above.Prices erupted from this Rectangle on February 11 with a typical Breakaway Gap.Four days later, another gap appeared on even greater volume, and prices closed atthe top of the day’s range. This looked like a Runaway Gap, in which case continuation to 32 was implied according to the “rule” stated below. (Note that the Rectangle“measurement” called for only 31.) On the following day, however, a One-DayReversal, from 31 back to 30, appeared, and the next session closed the February 15gap, which now had to be relabeled, tentatively, as an Exhaustion Gap (see page 219).Prices subsequently dropped back to the support of the 9-week Rectangle, ralliedgrudgingly along an established Intermediate Up Trendline, and broke that on April24 to return again to the 25 support. In May, another advance took “BK” up oncemore to 30, where it bumped against the previously broken trendline. That was itslast effort; in late July, the “valley” level at 25 was penetrated and a Major DoubleTop had been completed.To return to the February 15 gap, this is fairly typical of many cases in which it isimpossible to say whether Continuation or Exhaustion is being signaled until 2 or3 days after the day the gap is made.
more strictly limited, the gap-measuring rule works out particularly wellwhen applied directly on semilogarithmic scale charts. On arithmetic charts,look for a trifle more on the upside and a trifle less on the downside. (In anyevent, you will be wise to “bank” on something short of the theoretical goal.)Runaway Gaps are easy to find and identify in retrospect, but our taskis to recognize them as such at the time they appear. Of course, there is,obviously, no danger of confusing them with Pattern or Breakout Gaps. Withthose aside, any gap which shows up in a fast advance or decline after priceshave moved well away from an Area Formation (or the penetration of animportant trendline or break through a potent Support or Resistance Level,which we shall discuss later) may be a Runaway Gap. What then becomes
AU3772_book.fm Page 221 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
Gaps
221
40383634
BALTIMORE & OHIO
1936–1937
BO
32G
3028262422Sales100’s25020015010050
S
SH
OCTOBER NOVEMBER DECEMBER3 10 17 24 31 7 14 21 28 5 12 19 26 2
JANUARYFEBRUARY MARCH9 16 23 30 6 13 20 27 6 13 20 27
FIGURE 127. A good example of a Runaway Gap which performed according torule. After reacting from 26½ in late 1936, “BO” formed a Head-and-ShouldersBottom (the left shoulder was a Triangle) and broke out of it on February 6, 1937. Asmall Flag formed immediately thereafter, calling for 28. At that level, another Flagdeveloped which signaled 30½ or better. As prices reached this latter goal, however,a gap was made, on March 3, on extraordinary volume. The next two days confirmedthis to be a Runaway or Continuation Gap. As such, it implied further advance(measuring from the Head-and-Shoulders neckline) to 37 plus. “BO” made its BullMarket high at 40½ on March 17.The measuring-gap rule should be used for purposes of “getting out” rather than“getting in.” It does not guarantee that a move will continue to the implied limit,but it does give assurance that the move is near an end when the rule has beenfulfilled.
necessary is to distinguish it from our next type, the Exhaustion Gap. Usually,the price and volume action on the day following the gap furnishes theevidence required for a safe diagnosis.
Two or More Runaway GapsBut it will be much easier to bring out the characteristics distinguishingRunaway and Exhaustion Gaps when we take up the latter in detail. Beforedoing so, we must mention those cases where two, and, rarely, even three,
AU3772_book.fm Page 222 Saturday, November 18, 2006 5:29 PM
222
Technical Analysis of Stock TrendsHS
S
48SOUTHERN PACIFIC
SX
444038
G
3634323028261937242220191817Sales100’s25020015010050
RD
S
H
S
JULYAUGUST SEPTEMBER OCTOBER NOVEMBERDECEMBER3 10 17 24 31 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 25
FIGURE 128. Panic Declines often produce large Runaway Gaps. The September7 gap in this chart, judged by its size, volume, subsequent action, and the fact thatit was made in “new low ground,” marked it as of the measuring type. Implied goalwas 26 or below. All other gaps in this chart were obviously of the “common” variety.
gaps intervene in a fast move and are evidently all classifiable as of theContinuation or Runaway breed. It doesn’t happen often, and is particularlyunlikely to appear in the chart of a fairly large and active issue, but one ofthe thinner stocks in the midst of a “skyrocket” move may go skipping alongfor 3 or 4 days making gaps between each successive pair. The only questionof practical importance that arises in such cases is: where should the halfwaymeasuring point be located? No quick and easy rule can be laid down, butstudious inspection of the chart, especially of the volume trend, will usually
AU3772_book.fm Page 223 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
Gaps
223
afford an answer. Remember that halfway in these fast moves tends to comeat the stage where prices are moving most easily and rapidly with respectto number of transactions recorded (whence the tendency to gap). If thereare two gaps, the halfway stage may very likely have been reached somewhere between them. Inspect your chart carefully and try to “average” thepicture mentally; look for what appears to be the center of “thinness” anduse that for your measuring level. But remember also that each successivegap brings the move inevitably nearer to Exhaustion, so let your judgmentlean to the conservative side; do not expect too much of the second or thirdgap.
Exhaustion GapsThe Breakout Gap signals the start of a move; the Runaway Gap marks itsrapid continuation at or near its halfway point; the Exhaustion Gap comesat the end. The first two of these are easily distinguished as to type by theirlocation with respect to the preceding price pattern, but the last is not alwaysimmediately distinguishable from the second.Exhaustion Gaps, like Runaway Gaps, are associated with rapid, extensive advances or declines. We have described the Runaway type as the sortthat occurs in the midst of a move that accelerates to high velocity, thenslows down again and finally stops as increasing Resistance overcomes itsmomentum. Sometimes, however, “skyrocket” trends evidence no suchgradual increase of Resistance as they proceed, showing no tendency to losemomentum, but rather continue to speed up until, suddenly, they hit a stonewall of supply (or, in cases of a decline, demand) and are brought to anabrupt end by a day of terrific trading volume. In such moves, a wide gapmay appear at the very end, i.e., between the next to the last and the lastday of the move. This gets the name of Exhaustion Gap because the trendseems thereby to have exhausted itself in one final leaping spurt.The best test of whether a gap formed in a rapid, straight-line advanceor decline is of the Continuation or Exhaustion type comes on the day afterthe gap (more precisely, the day which makes the gap), although there arefrequently other clues in the preceding chart picture. If trading activitymounts to an extraordinary height during the session following the gap, andparticularly if the previous trend in prices does not appear to be carriedalong at a pace commensurate with that day’s activity, the gap is probablyof the Exhaustion class. This interpretation is reinforced, in fact, made avirtual certainty, if the day after, the gap develops into a Reversal Day (asdescribed in Chapter 10) with the closing price registered back near the edgeof the gap.Evidence that may be derived from the chart anteceding the gap maybe enumerated as follows. If the trend has already carried out the full implications of the price formation or Congestion Area from which it emerged,Exhaustion is more likely than Continuation. By the same token, if thereasonable measuring implications of the pattern of origin are still far short
AU3772_book.fm Page 224 Saturday, November 18, 2006 5:29 PM
224
Technical Analysis of Stock Trends
1918
NL
171944
G
1615G141312G
WILLYS – OVERLAND
WO
1110
9
G
8
7Sales100’s500400300200100APRILMAYJUNEJULYAUGUSTSEPTEMBER8 15 22 29 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 2 9 16 23 30
FIGURE 129. The “skyrocket” run-up of Willys–Overland in June 1944 was markedby a number of small gaps. The first two were too small to have much technicalsignificance. The larger gap made June 16 was marked by the “stickiness” of priceson that day as Exhaustion. A small Flag Consolidation ensued. The June 27 gap alsoacted like an Exhaustion Gap insofar as price action was concerned, but volume haddeclined instead of climbing to a new peak. On June 28, prices jumped away again,so the June 27 gap was now marked as another Runaway with an implied objectiveof 18½ plus, which had already been reached. Note the Head-and-Shoulders Reversalthat then formed and subsequent Intermediate Reaction.
of attainment, the gap is probably of the Continuation type. An ExhaustionGap is seldom the first gap in a runaway move; it is usually preceded by atleast one Continuation Gap. Thus, you may ordinarily assume (unless thecontrary appears from other and more weighty indications) that the first gap
AU3772_book.fm Page 225 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
Gaps
225
96A. O. SMITH CORPORATION SMC88807672686460G
56521945–194748444038Sales100’s5040302010N
D
J
F
M
A
M
J
J
A
S
O
N
D
J
F
M
A
M
FIGURE 130. “SMC” is a thin stock whose daily chart is usually “full of holes,”but this large gap that appeared on its weekly chart in September 1946 evidentlypossessed technical significance. Treated as a Runaway, and measuring from the8-week Congestion at 68, it called for a downside objective of 44 or below, whichwas duly fulfilled.
in a rapid advance or decline is a Continuation Gap. But each succeedinggap must be regarded with more and more suspicion, especially if it is widerthan its predecessor.We have referred to Exhaustion Gaps as wide gaps. Width is, of necessity,relative in this study; it is impossible to lay down any exact rules to definewide or narrow. Do not let this bother you too much. Recognition of whatconstitutes an unusually wide gap for the particular stock you have underobservation soon comes with a little charting experience.Runaway Gaps are usually not covered for a considerable length of time,not, as a rule, until the market stages a swing of Major or full Intermediateproportions in the opposite direction. But Exhaustion Gaps are quicklyclosed, most often within 2 to 5 days, a fact which furnishes a final clue to
AU3772_book.fm Page 226 Saturday, November 18, 2006 5:29 PM
226
48
Technical Analysis of Stock Trends
S
H
S1946
G- G44403836Sales100’s5040302010
BALTIMORE & OHIO PFD.SH
BO Pr
S
JANUARY FEBRUARYMARCHAPRILJUNEMAY5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
FIGURE 131. A small Island in the right shoulder of the Head-and-Shoulders Topthat marked this issue’s Major Reversal. The Island served only to emphasize thechart’s Bearish implications.
28LION OIL COMPANY
LNO
262422
1947G
20
G
19Sales100’s5040302010MARCHAPRILMAYJUNEAUGUSTJULY8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30
FIGURE 132. Island “shakeouts” are not uncommon in “thin” stocks. Why theyshould develop as they do is hard to explain, but their forecasting implications areobvious.
distinguish Exhaustion from Continuation, if it should still be needed at thatstage. (This, incidentally, upsets the common superstition that all gaps mustbe closed before the trend can be trusted to continue very far. In the case of
AU3772_book.fm Page 227 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
Gaps
227
the Runaway Gap, it is not closed, but the trend moves right along nevertheless, and often for a surprising distance. In the case of the ExhaustionGap, the closing of it actually contributes to the signal that the trend has runout.)An Exhaustion Gap, taken by itself, should not be read as a sign ofReversal, nor even, necessarily, of Reversal at all. It calls “stop,” but the haltis ordinarily followed by some sort of area pattern development which may,in turn, lead to either Reversal or Continuation of the move prior to the gap.However, in practically every case, enough of a Minor Reaction or delayensues from the formation of an Exhaustion Gap, before a new trend isestablished, to warrant closing out commitments at once. (One can alwaysreenter if it subsequently appears that the previous trend is to be resumed.)
The Island ReversalWe mentioned (at the end of Chapter 10) a Reversal Pattern, the Island, whichwas to be taken up under the general study of gaps. The Island Pattern isnot common, and it is not, in itself, of major significance, in the sense ofdenoting a long-term Top or Bottom, but it does, as a rule, send prices backfor a complete retracement of the Minor Move which preceded it.An Island Reversal might be described as a compact trading range separated from the move which led to it (and which was usually fast) by anExhaustion Gap, and from the move in the opposite direction which followsit (and which is also equally fast, as a rule) by a Breakaway Gap. The tradingrange may consist of only a single day, in which event it normally developsas a One-Day Reversal, or it may be made up of from several days to a weekor so of Minor Fluctuations within a compact price zone. It is characterized,as might be expected, by relatively high volume. The gaps at either end occurat approximately the same level (they should overlap to some extent) so thatthe whole area stands out as an Island on the chart, isolated by the gapsfrom the rest of the price path.We have said that an Island does not, of itself, appear as a Major ReversalFormation, but Islands frequently develop within the larger patterns at turning points of Primary or important Intermediate consequence, as for examplein the head of a dynamic Head-and-Shoulders Top. By the same token, theyappear occasionally at the extremes of the Minor Swings which compose aTriangle or a Rectangle (in which event, of course, the gaps that set them offare really better classified as Common or Pattern Gaps).The reasons why Islands can and do develop — in other words, whygaps can and do repeat at the same price level — will be more apparentwhen we take up the general subject of Support and Resistance in a laterchapter. Suffice it to repeat at this point that prices can move most rapidlyand easily, either up or down, through a range where little or no stockchanged hands in the past, where, in other words, previous owners have no“vested interest.”
AU3772_book.fm Page 228 Saturday, November 18, 2006 5:29 PM
228
Technical Analysis of Stock Trends
128BETHLEHEM STEEL
BS
120112104G
G
9688
807672686419376056Sales100’s25020015010050APRILMAYJUNEJANUARYFEBRUARY MARCH2 9 16 23 30 6 13 20 27 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26
FIGURE 133. This Island Reversal Pattern at Bethlehem Steel’s Major Top in 1937is a “classic,” yet it was followed by a curious and disturbing abnormality in thestrong rally that developed on March 30. Those who sold out on the Island’s signalaround 95 on March 19 or 20 were startled, and, if they had also sold short, justifiablyalarmed when prices jumped up a week later, not only through the second gap level,but well above it. But eventually, as can be seen, everything worked out accordingto the original forecast.This incident will serve to illustrate a general principle: when a clear-cut technicalpattern of unquestionable significance has been completed on your charts, do not letsome apparently contrary development that occurs shortly thereafter lead you toforget or neglect the previous plain signal. Give such situations time to work out.Figure 123 on page 212 shows the sequel to the above chart and, incidentally,another Island. Compare the volume.
Sometimes the second gap — the Breakaway that completes the Island —is closed a few days later by a quick Pullback or reaction. More often it isnot. Rarely, the first gap — the Exhaustion Gap that starts the Island — iscovered in a few days before the second gap appears, in which event theIsland Congestion takes on a sort of V-Shape (if it is a Top), and there is no
AU3772_book.fm Page 229 Saturday, November 18, 2006 5:29 PM
Chapter twelve:
44
Gaps
229
1936
G
G
40XD .50
38363432PENNSYLVANIA RAILROAD
PA
3028Sales100’s125100755025JULYAUGUSTSEPTEMBER OCTOBER NOVEMBERDECEMBER4 11 18 25 1 8 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 5 12 19 26
FIGURE 134. This looked like an Island in “PA,” but the second gap was actuallyattributable to a 50-cent dividend which went ex on November 20, and had, therefore,to be discounted technically. Because of this dividend, it was necessary to lower theSupport Line at 40 (see Chapter 13) by half a point. That Support, therefore, was notviolated in December, and prices subsequently advanced to above 50 the followingMarch.
clear “open water” across the chart horizontally between the Island and thetrends preceding and following it. In any of these variations, however, theinterpretation remains the same: the preceding Minor Move should be practically retraced.An Island Pattern is not easy to trade on, unless it be for a short-term“scalp,” as, obviously, a good share of the retracement may already havebeen accomplished by the time the Island is charted and an order to buy orsell on its indications can be executed. Of course, if the entering gap isrecognized as an Exhaustion Gap, the trader who is interested in the stockpresumably will take action before the second gap forms and before theIsland is in evidence. Perhaps, the greatest utility that Islands have for thechart analyst is that of calling attention to a situation, of putting him on thealert as to its potentialities.
Gaps in the AveragesGaps appear also in nearly all Averages but, for obvious reasons, with ratherless frequency than in the charts of individual issues. While it is not necessaryfor all of the stocks composing an average to make a gap simultaneously in
AU3772_book.fm Page 230 Saturday, November 18, 2006 5:29 PM
230
Technical Analysis of Stock Trends
order to produce a gap in the Average figures, a majority of them must. Asmight therefore be expected, Common or Pattern Gaps are particularly rarein Average charts, but Breakaway and Runaway types are not uncommon,although small as compared with the size of such gaps in single stocks.Exhaustion Gaps, and, in consequence, Islands, again are rare. The conditionsthat create an Exhaustion Gap seldom develop in a sufficient number ofindividual issues at any one time to produce a counterpart in the Averages.The technical interpretation of gaps in Averages is, in the main, the sameas in single stocks.