Previous Day Candle Color

If you also consider the candle color on Day –1, there are 18 possible cases. Each of the 6 cases just discussed can be preceded by either a white, black, or doji candle day. Table 5.2 reports the results for the 9 possible cases that can occur when the gap is down, and Table 5.3 reports the results for the 9 possible cases than can occur when the gap is up. A designation such as BUW is the notation used for Black-Up-White and means that Day –1 was a black candle, and Day 0 was a gap up white candle day. The other 17 cases are designated in a similar manner.

Table 5.2. Gap Returns Based on Color of Candle on Day –1 and Day 0 for Down Gaps

When looking at the 18 possible 2-day patterns, which occurs most often? Thirty-seven percent of all gaps follow the White-Up-White pattern. Thus, over one-third of all gaps seen in the market occur on strong upward price movement. The price moves upward on Day –1, jumps up at the open on Day 0, and then continues upward to close higher for Day 0. These gaps average, however, a smaller size than for any of the other 17 combinations except for the extremely rare Doji-Down-Doji pattern.