Page 320 - THE MARKET WHISPERER

316 PART 10 - Winning Trades

stock opening with a gap down. It is reasonable to assume that during the
current day, its price would climb to the previous day’s close and the gap
would close.
Gap Up for Baxter at Opening of Day’s Trading, BAX

Baxter ends the day’s trading at $47.24 [1] and opens the next day
at $47.61 [2], showing a gap up of some 0.8%. Here we see the common
phenomenon resulting from negative information which led to the previous
day’s drop, followed by opening the next day with a gap up that somewhat
pulls back from the previous day’s sharp low. Note that in this particular
case, the gap created on the second day of trade is “trapped” in the range
of the first day of trading. The fact that the gap is trapped further increases
the chances of the gap closing. As you see, during trading, the price drops
and closes the gap [3] and immediately thereafter changes direction and
rises back to the opening price level [4].

The gap-closing phenomenon, especially when relating to a gap trapped
in the previous day’s trading range, is well-known and carries an 80%
intraday chance of success.

Important note: the above is valid for gaps less than 3%. Higher gaps
will not close to the same degree, and in many cases will continue moving
in the direction of the gap rather than towards closing the gap.