Stock Gaps are caused by imbalances between buyers and sellers. If there
are no sellers and an overwhelming amount of buyers want into a stock,
they will be forced to raise their bid to the area where there are
sellers so they can satisfy their demand. The reverse is true when
sellers overwhelm the buyers. This usually occurs when there is
news on a business or the stock markets have some kind of economic
news. In trading, a trader should center their decision to buy or sell
based on the price in relation to supply and demand. Understanding
gaps with the supply and demand type of trading offers a powerful
price direction indicator.
Breaking the demand level on the gap shows that the sellers could
not locate any buyers willing to purchase at the former price level.
This is extremely bearish and as a consequence, the price continues to
slide. The opposite reaction would occur if the price gaps into, but
not past a supply or demand level or support and resistance.
The smart trader would have noticed that the price simply gapped up
to prior supply and the sellers waiting there easily absorbed the
buying pressure of the amateurs and sent price lower. Be sure to pay
attention to where price gaps into and practice good risk management.
Do not risk trading capitol and take positions before to the news
announcements and do not let your emotions get the best of you and buy
a stock before it hits a reversal area on the charts.
The technical stuff is true of course. However, all of this
bullish talk along with other news brings out the contrarian nature
in stock traders, suggesting that the upside for this market is
limited, or a correction is might be coming.
In addition, with every trading day, the evidence begins to accumulate
that a pullback seems likely in the markets. If this happens traders
can look to take some short positions. |
