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Candlesticks with Gaps: Gap down after downtrend

 

 

Gap analysis is a powerful tool in any candlestick trader's arsenal. We will look at four different scenarios relating to behind-the-scenes dynamics for gaps. In this article, we look at the case where a stock gaps down after a long downtrend.

When do most investors sell? It is a well known fact that most investors are 'panicked' out of their position. Just when they should be buying the stock, they end up liquidating their position. Why? They can no longer take the pain of holding the losing position. Their hope of getting back their hard earned money is negated by the fear of losing more money. This is in-built in our psychology. Most people make the same mistake...over and over again. That is the reason most people do not make money in the markets. They let their emotions overcome their intellect. Having no knowledge of chart analysis doesn't help either. When a candlestick trader notices a gap down candle in oversold conditions after a long downtrend, he/she recognizes that reversal of the stock might be near. Notice that the reversal might not start the next day. But this scenario alerts the trader to watch the next few days candle formations. A bullish candlestick signal is required to get long in the position.

Notice the chart of Infosys Tech. below. After a month long downtrend starting in mid-January, the stock gapped down. People wanted out of the stock at any cost. The panic selling pressure is seen in the form of this gap. Would a candlestick trader buy at this point? Certainly not. A candlestick buy signal is needed to get in the position. With a Bullish Harami the day after, the stock was ready to reverse direction and provide good profit.

Chart courtesy icharts.in