The downside gap filled pattern

The downside gap filled pattern rounds out my discussion of the bearish three-stick trending patterns. It's the most tradeworthy of all the patterns in this section because its close is higher than the others. It also calls for some pretty tight stops, so you'll know quickly whether the pattern is going to succeed or fail.

Recognizing the downside gap filled pattern

As you can see in Figure 10-28, the downside gap filled pattern starts off with a down day in a downtrend. Like the other trending patterns in this chapter, the second day is a gap down, and it's bearish. At first the gap between the first and second day isn't filled and remains on the chart. On the third and final day there's a lower open, but then the bulls push the price higher over the course of the day. The gap between the first and second day is then filled. However, at some point the bears decide it's time to take over again and the rise in prices stops, usually in the lower half of the first day's trading range. The downtrend is still in place.

Figure 10-28:

The downside gap filled pattern.

Trading the downside gap filled pattern

To give you an idea of how you can trade the downside gap filled pattern, I provide the example in Figure 10-29. It's a chart of Ingersoll Rand (IR), a manufacturer of various commercial and consumer machinery goods. The company is tied to the overall economy, so the stock can experience periods of volatility that present ample trading opportunities.

The downside gap filled pattern appears at the upper end of the downtrend, beginning with a black candle for the first day. There's a gap down opening for the second day, and the gap isn't filled as the day progresses bearishly. The third day completes the pattern with an up day that fills in the gap, and the downtrend continues after that.

^ben

If you shorted using this pattern, you'd be pleased to see some bearish action that continues for a while after the pattern is completed. However, after a few weeks, a bullish reversal pattern emerges. There's a doji followed by an up day in a downtrend, which is usually an indication that prices have reached a bottom. That would mean that it's time to exit your short position and walk away with your profits.

Figure 10-29:

The downside gap filled pattern predicts a downtrend continuation on a chart of IR.

Figure 10-29:

The downside gap filled pattern predicts a downtrend continuation on a chart of IR.

Failing to signal a continuing downtrend

I hate to end the chapter on a down note, but I do feel obligated to present you with a failing example of the downside gap filled pattern. For that I turn to Figure 10-30, a chart of DuPont (DD).

The pattern emerges in a downtrend, with a black candle that's followed by a gap down, which is eventually filled on the third day. All is as it should be in terms of pattern formation, but if you look closely, you can see an indication that the pattern may not hold up for too long. The strength of the downtrend appears to be moderating, and because the trend has been in place for a long time, it may lead you to believe that a reversal is on deck. These indications prove to be true when the trend turns upward over the course of the next couple of weeks. The high of the pattern is violated, rendering it null, void, and more than a little annoying.

Figure 10-30:

The downside gap filled pattern provides a dud signal on a chart of DD.

Figure 10-30:

The downside gap filled pattern provides a dud signal on a chart of DD.

Was this article helpful?

0 0

Post a comment