Chapter 5. Gaps and Previous Price Movement

For a gap to occur, obviously there must be price movement from one day to the next. A gap up occurs when today’s low is higher than yesterday’s high. So on a gap up there had been an upward jump in price at the open. But what happened during the day of the gap? Did the stock close higher or lower than the open? If the closing price is higher than the opening price, you would chart it on a candlestick chart with a white candle body. If the close is lower than the open, the candle body is shaded black. This chapter examines the significance of the candle color on the day of the gap, which is referred to as Day 0, and the candle color the day before the gap, which is referred to as Day –1.

Chapter 2, “Windows on Candlestick Charts,” focused on traditional candlestick patterns that contained gaps, or windows. These short-term patterns often considered the color of the candle on the day of the gap and the colors and positions of the candles 1 or 2 days after the gap. The analysis in this chapter is different in that the price movement leading up to the gap and on the day of the gap, rather than after the gap occurs, is examined.