What is a Gap?
Gaps occur because of some fundamental event. It signifies dramatic change in investors perception about a stock post certain event (new product, management change, earnings) and stocks gap up post that on following day. Once that happens, then the rule is that the lower end of the Gap becomes a strong support level.
Let us look at this phenomena on Microsoft stock chart
Microsoft opened with a huge gap-up in October post earnings above 48.5
Now because of sell off in US market, Microsoft stock has come down and filled the gap it created in October. Ideally, this level of 48-48.5 should act as support. Also, the gap support converges with 200 dma
The objective of writing this post was to illustrate a technical event. I will do a follow-up on this post few weeks/months down the road.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers