Tuesday, January 24, 2012
Signs of counter-trend strength in a gap open
Large gaps tend to widen rather than close, since something fundamental would have changed to cause the large gap. However sometimes a large gap will attempt to close and will trend for the rest of the day, often closing at its high.
The first bar after open (b1) closing opposite to the large gap is usually the first sign of strength. If its an average size trend bar or a reversal bar, its a very strong sign. (If the gap is small, the bar could simply act like a pullback and should not be considered).
A b2 triggers such a b1 and closes strong is a second good sign. If b2 attempts to widen the gap and fails giving an fBO (b3) its also a good sign.
1tfs (b7,9) and 5tfs on attempts to widen the gap are the next signs to look for.
Strong trends will usually have shallow pullbacks and average sized bars instead of deep pullbacks and large bars.