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Continuing to Focus on Last Week's Gaps

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In the ND Composite, watch the action around 1942 (gap to Thursday's high) and 1965 (200 day average)!

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In yesterday's post, I highlighted the gap pattern in the major indices and the potentially positive bias (going forward). Why am I so interested in the gaps? Generally speaking, the behavior surrounding a demonstrative gap in the markets will serve as an indicator of future direction. Put simply, it's rare that we see large gaps (such as last week) and the market just goes nowhere over the next few weeks. A demonstrative gap can mark a point of exhaustion or a point of continuation. To illustrate an example of exhaustion, we can look back to mid-August. At that time, we discussed the potentially exhaustive nature of the Nasdaq Composite gap and that if that level was recaptured, the outcome would be similar to March '04 and May '04.

This too may prove exhaustive. But since the indices posted consecutive gaps, we should at least consider the possibility that this is a point of continuation instead. And the longer the index remains above (closing level is key) the high of Friday's bar (1942), the more positive the potential outcome. The query below further illustrates this notion.

How do I incorporate this into my own trading? Every trader's timeframe is different. But I'm keeping a close watch on the 1942 closing level. Conversely, a move above the 200 day average (1965) suggest a test of the year's trendline at 1994. As always, past performance does not indicate future results.

No positions in stocks mentioned.

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