Could you please tell me if you take into consideration price gaps in your technical analysis and if you are of the opinion that gaps always have to fill on a certain period of time. (March 26, 2003)
There is an old adage that all gaps have to be filled. In many cases they are filled shortly after the gap is made, e.g., after a gap to the upside and the initial surge there can be a test back to fill the gap and test the breakout (and to the downside as well). It does not always occur, at least not a full and complete fill of the gap. When a stock makes a big breakout and it is mostly gap, I always get a bit uneasy about jumping right in, particularly when the stock gaps higher and basically goes nowhere further during that session. If a stock gaps up just a bit over the prior close and then continues to run, I am not nearly as worried about the gap being completely filled. In that light it is more a question of the size of the gap and the action intraday following the gap as opposed to all gaps being treated the same way.
We took a look at gaps in the indexes over several decades a year or so ago in response to a claim that 'all gaps are filled.' There were some gaps filled over the past three years as the Nasdaq, for example, has traded down to 1996 levels. It took quite awhile for those gaps to be filled however. If you waited for the fill, you would have missed a run of about 3000 points or so. The gaps were filled, but it took a might long time. There was a gap off the October low in Nasdaq. There were several gaps on the further move up from there. Recently there was a gap off of the March low. Do they have to be filled? Some are not filled, some are not filled for years. So, do you avoid a play or run because of a gap? We don't unless we don't like how the gap looks as described above. Good question.
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