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Wednesday, September 16, 2009

Exhaustion Gaps


An example of an exhaustion gap from Stockcharts.com:


And the accompanying text, via their free Chartschool:

"Exhaustion gaps are those that happen near the end of a good up- or downtrend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day's close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume.

It is almost a state of panic if the gap appears during a long down move and pessimism has set in. Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise, if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up. Prices drop, and a significant change in trend occurs. Exhaustion gaps are probably the easiest to trade and profit from. In the chart, notice that there was one more day of trading to the upside before the stock plunged. The high volume was the giveaway that this was going to be, either, an exhaustion gap or a runaway gap. Because of the size of the gap and the near doubling of volume, an exhaustion gap was in the making here."

Now take a look at my Junk chart. 2 days in a row with an uncovered gap after a massive rally. And on higher volume. Exhaustion gap? Its a good bet to take regardless.

There are many stocks that sport this "breakout" look to them. I could show many from GE to Apple and a lot, lot more over the last couple days. Actually many stocks sport 2 days in a row uncovered gap ups which is really zany. The flipside is that these are "runaway" gaps which represents something more significant. But really are you betting all these stocks after a 60% rally just experienced runaway gaps? Do you think that a weekly qqqq's that is the most overbought since the zaniness of 2000 just experienced a runwaway gap in many of its stocks?

It makes decent sense to short these at least to fill these gaps up. Yet shorts are being laughed and ridiculed at the moment. The bulls are as arrogant as the shorts were at 675 SPX. Exhaustion gaps usually reverse within a day or so. At least thats what my chartschool is telling me.

And when a whole bunch of them reverse, what will take them back into another state of exhaustion?







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