CHARTING Price Islands perilous sailing for speculators

Press, 19 February 1986, Page 36

CHARTING Price Islands perilous sailing for speculators

We are going to study a charting phenomenon that leaves most chartists out in the, cold. Several books on charting do not even give it a mention and others give it a superficial explanation. That does little or nothing to help you if the problem arises. Since the phenomenon occurs with such regularity, we will attempt to lay bare its message. A gap is an open area on a chart created by prices trading entirely above or below the previous day’s trading range. It may be caused by extreme demand (upside gap) or supply (downside gap). It can also be caused at a well known stop-loss point where speculators are unwilling to take an opposing position.

The illustrations have been deliberately chosen to highlight: ® That they can occur in any type of market.

® That the volumes in these very active markets give no clues as to their implication. ® That the particular gap we are studying is the most reliable of all the types of gaps you are likely to encounter.

For want of a better name we will call the gap we are studying “the archipelago reversal.” The reason should soon become obvious. The gap can occur when the market is in new high ground or after a substantial rally after the market has had

a decline. No matter, the essential characteristics are that the price will proceed to gap up and trade well above all the previous day’s trading ranges. Volume 'toll tend to be much the same as any other trading day. Day two will find the market again trading well above the gap area and within the previous day’s range._ Day" three will also find

the price range in the gap area. The logical explanation for this three-day stalemate is that the shorts are being forced to cover their positions, while the bulls are awaiting the next push upwards. The close on the third day will sometimes indicate the next direction the market will trade, but this is certainly not decisive.

Day four is the key to the next major trend of the market. Unfortunately the market leaves the bulls trapped. How are they trapped?

Take a look at the charts and you will notice how this pattern derived its name. See the three days where the trading range gapped up and traded in isolation. That is the group of islands, or archipelago, and the gap area surrounding it is the sea. One side of the market has been left stranded, in this case the longs or bulls.

In each and every example shown on the charts that pattern was a precursor to very major trend reversal, in fact horrendous falls in the price that ensued. I have had the misfortune to have had this lesson beatgen into me. Please do not forget it unless you would like to have a smaller bank balance. To summarise:

® If after a substantial upmove in a market, the market gaps up and trades for exactly two

days in the gap the move upwards should be viewed with suspicion. ® If on the third day it still trades in the gap area and if you are long, you must liquidate your positions and get out of the market.

® For aggressive traders, the third day is the one to go short on.

• Why it takes three days is not clear. Accept it as a fact and position yourself accordingly. ® If you are long and left stranded, then basically you have no choice but to go chasing after the market to liquidate your losing positions as quickly as possible. ® The conservative trader’s opportunity to go with the trend will be in the next reaction rally. - • Next article: We will continue our study of gaps and look at the "exhaustion gap.”

This is the sixth in a series of articles, on charting by GEORGE PRICE futures broker with Egden Wignall and Company. The articles are printed intermittently on Wednesdays.