|Significant declines evolve into long bottoms
characterized by failed rallies and retesting of prior
lows. As new accumulation slowly shakes out the last
crowd of losers, a stock's character changes. Prices
push toward the top of key resistance. Short-term
relative strength improves and charts print a series of
bullish price bars with closing ticks near their highs.
Finally the issue begins a steady march through the wall
marked by previous failures.
||Stocks must overcome gravity to enter new uptrends.
Value players build bases but can't supply the critical
force needed to fuel rallies. Fortunately, the momentum
crowd will arrive just in time to fill this chore. As a
stock slowly rises above resistance, greed rings a loud
bell and these growth players jump in all at the same
|The appearance of a sharp breakout gap has tremendous
buy power. But the skilled trader should remain cautious
unless the move is accompanied by heavy volume. Bursts
of enthusiastic buying should draw wide attention, which
ignites further price expansion. When volume fails to
show, the gap may quickly fill and trap the emotional
Non-gapping, high volume surges provide a comfortable
price floor similar to gaps. But support may be more
difficult to measure. And momentum can take longer to
develop, forcing a stock to swing into a new range
rather than rise quickly. Fortunately this scenario also
sets up pullback trades as support forces profitable
The uptrend terrain faces predictable obstacles marked
by Clear Air pockets and congestion from prior
downtrends. These barriers force frequent dips that mark
good buying opportunities. The trader must identify
these profitable zones in advance but also recognize
that dips will disappear during the strongest rallies.
Here price blasts through prior resistance as enthusiasm
During uptrends, one goal is to locate runaway expansion
moves. As trend builds momentum, both gapping and
non-gapping surges will register on technical
indicators, such as MACD or ADX. Short pullbacks should
not violate the math of this developing strength. As
volatility absorbs each surge, more powerful rallies
should erupt. During these events, price range and
volume will expand bar to bar, often culminating in a
second (continuation) gap and a final exhaustion spike.
|Break and Run: Gap
breakouts are more likely to rise toward higher
prices immediately than simple volume breakouts.
Waiting for a dip may be futile. Extreme crowd
enthusiasm ignites continued buying at higher
levels and market makers don't need pullbacks to
generate volume. If entry is desired, use a
trend-following strategy and manage risk with
absolute price or percentage loss stops.