Importance of gaps in Technical Charts

The last few weeks have been bad if you are a bull in the stock markets. With several banking scams like the PNB scam coming into the limelight, market sentiment has turned very bearish indicating a clear lack of confidence amongst the bulls to carry forward their buy positions lately.

However, a telling sign that markets are currently in a bearish mode are indicated in the form of gap formation in charts. Gaps are generally a difference between prior closing and current opening price or one could say a place where there are no trades. There are primarily 2 types of gaps which are gap up & gap down as indicated in the picture below.

Gaps are a perfect reaction to either an extremely positive or negative sentiment prevailing in the market. Ideally as per Japanese candlesticks, the place from where the gap starts in a gap up becomes your support as it indicates confidence amongst traders to trade long and a gap down indicates a thumb down by traders indicating further short positions are being added based on the negative news or sentiment in the market. If you click on the link given here https://invst.ly/6v0ql, you would understand the 2 most important gap down resistances i.e. 10586 & 10784 have not been breached on a closing basis by the bulls. Unless Nifty starts trading above 10586 on a closing basis, this bull market will not continue and we could see further lower levels in the coming few weeks.

Gaps generally occur in intraday i.e. 15 minute & 5 minute charts and hence serve an ideal purpose to make easy profits both in long & short positions. Hence good technical knowledge coupled with strong understanding of candlesticks & indicators can go a long way in helping you profit irrespective of a bull or bear market.

17th March 2018

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