Since Wednesday was PI day (3.14), I thought I might update my PI trade article, says Dave Landry, f...
Trading Breakaway Gaps
12/16/2009 12:01 am EST
Editors note: Toni Hansen has produced an excellent video explaining how to use breakaway gaps in short-term trading. The video can be viewed below, and a text transcript immediately follows.
Breakaway gaps are an excellent form of gap to watch when you're trying to locate securities with a high probability of a trend day. They are gaps which break the security out of a trading range or congestion zone and are a much stronger confirmation than a non-gap breakout of a range. The gap itself will then serve as support for the security in the case of an upside gap allowing it to more easily continue in the direction of that gap itself. True breakaway gaps rarely close in the days immediately following the gap.
In our GLD, one of our first breakaway gaps heading into the summer took place on May 16th, it came out of this trading range where a number of common gaps took place, but then on the 16th a gap above the congestion for most of that range. Notice that following the gap itself, the security was not able to completely close the gap from the previous day’s close. It held that closing price and continued with a strong trends day on the upside, even continuing that trend for several days following it.
Notice that volume also increased with this breakout hence confirming the breakout itself. Another example of a breakaway gap was a little bit of a variation of this. There was this two-wave correction within a larger congestion zone and then as that congestion broke free, you can see a gap confirming the breakout of that move. The gap itself took place on the third test of the highest of this trend channel if you draw a trend channel line connecting the initial high of the congestion to the second high of the congestion and then expanded that and extended it into the end of June. Confirming the breakout from this larger congestion move was a continuation pattern into the middle of July.
There was another nice solid pullback into this 20 days simple moving average zone with a lot of overlap from one bar to the next, and then on the 11th of July our GLD broke higher out of that pullback, out of that congestion with another breakaway gap. Notice the gap again had a very difficult time closing and to move that to a larger continuation pattern on the upside for several days.
The larger breakout continued with a breakaway gap on July 21st with another pullback, this time not quite to the same extent as the previous one, but still a congestion lasting about four days with a break higher out of that range. Even when you do have a closure of the gap, notice that that closure of the gap itself serves as a support zone. We saw this back with the larger breakout, which took place back here on June 30th and again with this breakout and continuation on July 21st.
Breakaway gaps are one of my favorite types of gaps to look for when I'm trying to find securities that have a high probability of a trends day or at the very least a trend morning because they tend to offer the best follow through on the upside and on the downside as well when this pattern is flipped over and reversed.
By Toni Hansen, president and CEO, Hansen Finance Group
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