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Lesson of the Day
with Jeff Drake
Measured and Exhaustion Gaps
Identifiable Patterns After Confirmation Move
We have previously mentioned the three types of gaps that are of relevance to
investors - the breakaway gap, the measured (or continuation) gap, and the
exhaustion gap. We previously discussed the breakaway gap, but it is
important to discuss the measured gap and exhaustion gap at the same time.
Why? Because it is difficult to tell one from the other until after the fact.
A measured gap occurs
when a security has been in a trend, then gaps in the direction of the trend,
and then it continues its move. This explains the continuation gap name. But
why is it also referred to as a measured gap? Because this behavior often
occurs at 50% of the total move. In other words, it is 'measuring' the
halfway point of the total move.
However, there are times
when a security will gap in the direction of the trend, but then reverse and
move the other direction. This is known as an exhaustion gap. Just as a
measured gap is a sign of a continuation move, an exhaustion gap is a sign of
a reversal. The problem is that often times these gaps when these gaps occur,
it is difficult which one of these two gaps it is.
The solution is not a popular
answer, but the right one. It is important to wait for price action to
confirm which type of gap we are looking at. If price continues in the
direction of the trend, we are most likely looking at a measured gap.
However, if price reverses we have witnessed an exhaustion gap.
Both of these gaps are
good indications of future movement. While the fact that we have to wait for
the move after the gap for confirmation may seem difficult to those of us
lacking patience, it often proves to be the profitable move.
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Eaton Corp gaps
during the trend and then continues its upward move
CSG falls after the
gap, giving us a good example of an exhaustion gap
Honeywell
International's measured gap marks the 50% point of the complete upward move
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