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Candlesticks with Gaps: Gap up after downtrend

 

 

 

In this article we look at another gap scenario after a downtrend. Here the stock gaps up, typically after a candlestick reversal signal. Gaps represent a powerful force. When the gap is a gap up in oversold conditions after a downtrend, it implies heavy change in investor sentiment. Traders and investors wanted to get in the stock in a lot of hurry. the reason is immaterial. The huge demand in pre-market hours causes price imbalance. The stock has to be priced higher than where it closed the night before to get supply/demand equilibrium. For a candlestick trader, this gap up scenario reveals the underlying strength of the soon to be up move. It gives the trader the confidence to buy the stock, even though it might be up significantly for the day.

Notice the chart of FINANTECH below. After the stock sold off late June/ early July 09, it made a Hammer sort of formation with stochastics oversold. This was the first alert for the candlestick trader looking to get in. What is needed after a candlestick buy signal? Confirmation. A gap up and bullish close provided the confirmation and the confidence for traders to get in anticipating a strong move to the upside.

Chart courtesy icharts.in