The bullish gap on heavy volume is a potent signal that a short term correction or a major correction is ending. It often signals a fresh new uptrend in the stock. There are two very important technical concepts here that make this pattern very very powerful.
First of all, there is a gap up.
Secondly there is heavy volume.
For those of you who have been trading for sometime, you will definitely know the importance of gap ups and heavy volume. For those who are new, let me just explain to you how important these two concepts are.
Why do stocks gap up? Why do forex pairs gap up? Why do indexes gap up?
News will make them gap up. Announcements may make them gap up. But if you study them properly, you will know the reason they gap up is because demand outweighs supply.
Its a classic economics concept.
Prices of an item is affected by the laws of demand and supply. Suppose you go to a grocery store and you notice that a can of coke costs $1. If you buy more, you might even get it cheaper. Imagine one day, you visit a tourist destination where it is hot. After a few hours walking around that place, people start to get thirsty.
You will conveniently see some guy standing by the roadside trying to sell soft drinks. You go over to his stall and see that a can of ice cold coke costs $3. Will you pay for it?
Of course you would if you are hot and thirsty. With so many tourists around and thanks to the hot weather, $3 for a can of cold coke is justifiable. Demand and wants causes the price of the coke to skyrocket.
Notice that there is a gap of $2 between the price of a coke in the grocery store and the can of coke at the tourist hot spot.
That is exactly why stocks gap up. Demand will cause the stock to gap up leaving a hole in between yesterday's closing price and today's opening price. The gap up is good and can often indicate that the stock is now in demand.
The summary for this section is: Gap ups usually signify demand and are therefore bullish.
Heavy volume in a stock can often tell us that the stock is on the radar of many traders and investors. Volume is important because they show interest and the buying action causes the volume to be printed in the charts. Unusual volume is the key to spot if a stock is in demand or not.
Let's say that the average trading volume for the stock is 3 million shares a day.
However, on the day that it gaps up, you notice that the volume shoots up to 30 million shares. What does this mean? Remember that gap ups are bullish. With heavy volume, it adds another piece of confirmation to us that the stocks is really really in hot demand.
Combining Gap Ups And Heavy Volume
Now that you know the importance of gap ups and heavy volume, when you combine the both of them, you get a pretty clear picture that the stock is extremely bullish in the near future.
I have dealt with the concept of unusual volume in many other articles. In this article, we are actually looking at bullish gap ups on heavy volume after a period of declining prices. When you see a bullish gap up on heavy volume after the stock has corrected for some time, it can often signal to us that a new uptrend or upwards move is around the corner.
If you are interested in other articles about unusual volume and how it affects stock prices, check out the articles below.
Okay now let's get back to the current topic at hand and look at some trading examples below. Theory is good but it is always the best to look at some real live examples on the chart. That way it will bring the knowledge into the real world of trading.
Now that we have learned the theory, let me just take some time to show you some great example of this theory in action. It is when you see it happening in real world examples of stock charts, you begin to appreciate the power behind the education that I'm giving you.
If you study this pattern well, you might be able to spot a stock that is going to explode higher in the near future.
The chart above is the daily chart of ABBV. The stock had a nice run up in late August to early September and it started to correct in the middle of September 2017. The stock first show a sign of reversal by forming a bottoming tail at its rising 20 MA.
The next day, the stock gap up on heavy volume. This is a very good sign that the stock might go up higher. When a stock that is declining suddenly reverses direction by gapping up with heavy volume, it is a powerful sign of more bullishness.
Notice how the stock ran up for the next few weeks giving the swing trader a nice trade.
ROST was in a bad downtrend all the way to August 2017. Then all of a sudden, the stock had a bullish gap up on heavy volume. Usually this will be caused by earnings or some important news.
The stock gap up above the 20 MA and also the 50 MA signifying a huge change in sentiment. The unusual volume of more than 10 million shares being traded also told us that buyers were really interested in the stock.
Although the stock did not immediately rise but traded sideways, the gap up on unusual volume has already hinted to us that this stock had the potential to reverse direction and go higher. ROST moved higher in the weeks to come and started making higher highs and higher lows confirming the start of a new uptrend.
Sometimes a stock can drift sideways making the investor feel very bored with the stock. It tries to go higher and then drifts lower with no sign of an uptrend. Then a gap up appears on heavy volume and sends the stock higher.
This is what happened to ADI. Notice how ADI drifted lower for a period of time. Then all of a sudden, a bullish gap on heavy volume appeared. The stock rose for 2 days and then had a correction. But it started to form a higher low and from there, the stock begin a new uptrend.
What made the difference?
You guessed it. It's the bullish gap up on heavy volume reversal pattern once again!
See, I told you that this pattern is really powerful. If you look at enough examples, you will be able to spot the next winner without much difficulty.
A bullish gap up on heavy volume may also signal the continuation of an existing trend. Sometimes, the stock will have a short term correction and this might put a lot of fear into the hearts of investors. They might feel that the correction might turn into a bigger crash.
AMAT above, had already started a new uptrend. It was making higher highs and higher lows and it was trading above its rising 20 MA and 50 MA. Then in late September 2017, it started to correct quite a lot. This might scare off many investors or traders.
One day, it gap up slightly but by the end of the day, it was up on unusual volume.
By the way, the blue line in the volume area is the 50 day average of the volume in the stock. You can see that on the day of the gap up, the volume is almost twice the normal 50 day average. This indicated buyers were stepping into the stock and the possibility of the stock moving higher is good.
Notice how the stock continued to make a nice uptrend. Since it is still in an uptrend, it is likely to move higher in the future.
Let me just show you one last example. Actually this example is still in the making.
Recently (at the time of this writing) AMZN reported earnings on October 27 2017 and the stock gap up and moved higher by 13%. The volume during the bullish gap up was significantly higher than the 50 day average. A total of 16.6 million shares were traded on that day which is about 3 times more than normal.
What is most interesting is that when AMZN gap up and gained 13%, it catapulted Jeff Bezos, founder of Amazon to become the richest man in the world. He is now worth more than Bill Gates and his personal net worth is north of $90 Billion USD.
The price action in AMZN right now is extremely bullish. And if history repeats itself, I believe that Jeff Bezos' net worth will continue to climb.
My dear friends, from now on, start to look for gap ups on unusual volume. Now that you know what they mean and what they represent and how they affect stocks, you are in possession of a powerful knowledge that might change your investing and trading reality. The bullish gap up on heavy volume reversal pattern is extremely powerful and you should pay attention to the stock when it makes this pattern.
Charts with the Freestockcharts.com label are courtesy of Freestockcharts.com
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