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Understanding Stock Gaps: Cisco Case Study


The networking equipment manufacturer offers a lesson in "gapology."

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"Gaps are meant to be filled" is an old trading adage -- and Cisco (NASDAQ:CSCO) is about to give us a lesson in "gapology." Shown below are two competing gaps in this chart: one from a breakdown (August 2013) -- an old pro-gap that has been pushing down for a long time -- as well as a gap that's pushing up after an earnings beat and a month-and-a-half of sideways action. 

The question is, which gap gets filled first? Cisco has been developing a nice trend move higher since the December 2013 bottom. There's also a positive moving-average cross, which now confirms the trend and points toward the earnings beat. The trend hovers without truly testing the gap fill on the newly formed earnings gap, while working off some of the overbought conditions. The older a gap is, the less power it has. So, based on what I know of gap trading, I believe that the old gap gets filled first. Additionally, based on what I'm seeing in trend quality and momentum, I sense these are also clues of Cisco filling the gap above first.

Click to enlarge

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