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Question of the Week: 7/8/2011

How do we interpret opening gaps and do they hide structure (like missing waves)?

Answer:

Yes, gaps can hide structure, but they can also provide a great deal of information about what might be going on. In most cases, a gap-opening occurs under one of the two, following conditions:

1. An unexpected news event occurred between the market's last close and its next opening.

2. The market is positioned where a violent move is part of the pattern's behavior. For example, a-waves in Flats, and especially a-waves within contracting Triangles, are typically violent. Wave-3 within a 3rd extension impulsion is also likely to produce an opening gap in markets that don't trade 24-hours-per-day. Finally, e-waves of expanding Triangles commonly experience gaps that produce "island reversals."
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