EarningsBeats.com Digest for June 10, 2020
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Here's When I Use The Top Of Gap Support Instead Of The Bottom
If you've followed technical analysis, then you're aware of gaps and the fact that price action has a tendency to "fill the gap". Let me explain gap fills for those that don't understand the phrase. If ABC stock closes one day at $10.00 and opens the next day at $11.00, then a GAP in price has occurred between the closing price one day and the opening price the next. Sometimes we see news released after the market closes that causes the gap.
It could be company-specific news like a quarterly earnings report. Or it could simply be industry group news or possibly just an overall gap in the entire stock market based on an economic event - like the strong jobs report we had last week. In any event, a "gap fill" means that a stock later returns to that prior day's closing price, effectively "filling the gap" created by the news event. Many times we see gaps with no news at all. The following chart of
Everbridge, Inc. (EVBG) shows 3 distinct gaps that were created by strong quarterly earnings reports. Check them out:
In EVBG's case, all three strong earnings reports resulted in gaps higher and then EVBG continued moving higher that day, printing bullish hollow candles on very large volume. When I see this type of gap, I look to the top of the gap as key support, not the bottom. In other words, based upon my experience, these types of gaps do not always get "filled", so waiting to enter at the prior day's close can result in missing a solid trading opportunity.
On the chart, the solid green horizontal lines represent the TOPS of gap support, while the green-dotted horizontal lines represent the BOTTOMS of gap support. Notice in all three instances, EVBG did not return to the prior day's close, although this 3rd gap higher maybe hasn't played out just yet. But, in my opinion, we likely will continue to rally without a gap fill.
Happy trading!
Tom Bowley
Chief Market Strategist
EarningsBeats.com
Better Timing. Better Trades.
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