The upside gap filled pattern

The final bullish three-day pattern that I explore in this chapter is the upside gap filled pattern. It offers bullish trend confirmation, but it's particularly nice because the gap that's created gets filled without violating the prevailing uptrend. Sometimes gaps on charts are targets for either longs or shorts to push trading to fill the gaps. But with this gap filled, there isn't a gap present to encourage the shorts to take action.

Recognizing the upside gap filled pattern

The upside gap filled pattern is aptly named, as you can see in Figure 9-28. The first day is a white candle that occurs in an uptrend. The second day is bullish, with a gap opening and a closing that establish a gap. The third and final day is bearish, and it actually closes the gap, but it doesn't violate the low of the first day.

A low level for entry on the final day makes this pattern very attractive in my opinion. Also, as the low of the first day would be considered a stop level, losses are typically minimal when the pattern doesn't work as planned.

Making wise trades using the upside gap filled pattern

Examine the price action depicted in Figure 9-29 for a look at how you can profit from a trade by using the upside gap filled pattern. The stock charted is Edison International (EIX), a utility that deals primarily in southern California. This is actually the second time EIX has been used as an example in this chapter. (Have a look at Figure 9-15 for the first.) I guess utilities can be fun to trade!

The pattern in this chart emerges pretty early in an uptrend. The first day is an up day, and it's followed by a white candle for the second day, which gaps up. The third day is a down day that fills in the gap and closes in the range of the first day. The upside gap is filled!

The price action following the pattern is muted for a few days, and it even looks like the pattern will fail as prices come close to the low of the first day. But the bulls prevail, and the trend continues upward for some time.

Figure 9-29:

The upside gap filled pattern creates an appealing trading opportunity on a chart of EIX.

Figure 9-29:

The upside gap filled pattern creates an appealing trading opportunity on a chart of EIX.

The upside gap followed by lower prices

But the bulls don't always prevail, of course. The upside gap filled pattern can go wrong, and although it's ugly, you need to know what it looks like when it happens. Check out Figure 9-30. It shows a pattern failure on a chart for the stock of Comcast (CMCSA), which provides cable TV, Internet, and phone services to many Americans.

The pattern on the chart in Figure 9-30 occurs at what would've been the very beginning of an uptrend, if the pattern had worked out. There are a few up days that start to indicate that the trend is positive, and then the first day of the upside gap filled pattern appears as a very long white candle. It's followed by an upside gap that closes, leaving that gap in place. Finally, the third day is a down day that closes the gap and closes within the first day's range.

This pattern takes a while to fail, and like several of the other examples in this chapter, it may illustrate a situation where you'd be better served by bailing out of the trade because of time concerns than by exiting because of a clear price level violation. After all, you can probably do more with your money in another trade than you can with it tied up for what seems like forever in a questionable upside gap filled pattern trade.

Figure 9-30:

The upside gap filled pattern fizzles out on a chart of CMCSA.

Figure 9-30:

The upside gap filled pattern fizzles out on a chart of CMCSA.

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