Science of Stock Price Action:
When stocks Gap-up to account for a big sentiment change, then stocks usually pullback to fill the gap. When the Gap gets filled, dip buyers enter the stock and take it higher.
I applied the above concept on Alibaba Holdings on Jan 02 2017. This is how the Alibaba stock Chart was positioned as of Jan 02 2017
As you can see in the chart above, there was a Gap which Alibaba stock filled by Jan 02 and there was hope back then that dip buyers will oblige. Just see how Alibaba stock reacted- the stock is up 10%
Another Case: L&T stock has been holding Gap support for some time now
As you can see in the chart above, L&T stock has been consistently finding support at the Gap filling levels
Now let me add one more version:
When stocks Gap-up and breakout above a well-defined resistance, then the resistance becomes the support. In such scenarios, stocks might not pull back all the way down to fill the Gap. The previous resistance becomes the new support
Let me share one recent example: Genworth Financial (Name of the stock is immaterial - focus on the pattern)
As you can see in the chart above, the stock was earlier facing resistance at 200 dma but then one fine day, it made a huge gap up above 200 dma and then followed it up with a strong rally. Now, the stock has come back and trying to hold 200 dma (previous resistance = new support). If the previous breakout move was for real, then this pullback at 200 dma appears like an attractive opportunity.
Always remember, in the market, there is no guarantee..Patterns are just lines on charts and a powerful market moving event can smash and destroy the chart anytime.
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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