The upside tasuki gap pattern

The three-stick trending pattern in this section can be considered a deviation of the patterns described in the preceding two sections. The upside tasuki gap can just as easily be called the upside white line beside black line pattern.

The name tasuki is a Japanese word for a sash that holds up a shirt sleeve. I've got to be honest: I'm not sure how that relates to the pattern, but it's fun to say, and the pattern can lead you to some great trades, so I won't question it.

Spotting the upside tasuki gap pattern

The upside tasuki gap starts with a white candle in an uptrend. The second day is much like the second day of the side-by-side white lines pattern that I explain earlier in this chapter. It gaps higher and closes higher for the day. The third day is much like the third day of a side-by-side black lines pattern (described in this chapter in the section "The bullish side-by-side black lines pattern"). There's an opening in the same range as the second day and then some lower trading, but the gap isn't completely filled in. Check out Figure 9-25 for a visual representation.

I like this pattern because it offers an attractive entry point, especially when compared to the side-by-side white lines pattern. Getting to buy on the low end of any candle when there's a bullish signal is fine with me.

Using the upside tasuki gap pattern for a successful trade

The chart in Figure 9-26 forms the basis for my explanation of how you can use the upside tasuki gap to make a profitable trade. The chart is for the stock of Illinois Tool Works (ITW). It's a great proxy on the overall economy because its interests are wide and varied. The company creates products that are used in just about every type of mechanical product you can imagine, from semiconductors to dishwashers.

Figure 9-25:

The upside tasuki gap pattern.

Figure 9-25:

The upside tasuki gap pattern.

Figure 9-26:

An upside tasuki gap pattern that provides a useful signal on a chart of ITW.

Figure 9-26:

An upside tasuki gap pattern that provides a useful signal on a chart of ITW.

The tasuki gap in Figure 9-26 just barely passed the rules for the pattern. The gap between the high of the first day and the range of the last day was so miniscule that I had to double-check the data to make sure it was valid. There's a gap there, but you have to get out the magnifying glass to see it!

I also chose to include more history on this chart than I do for the other examples in this chapter, to show that although the trend is sort of flat in the near term, there's a longer term uptrend in place, and that trend is actually tested with this pattern. I include a trendline on the chart to reinforce that point.

The nuts and bolts of the pattern are where they should be. The first day is a long white candle in the middle of an uptrend, and it's followed by a gap up and another up day. The third day encroaches the gap, but the gap is still intact at the end of the day, offering evidence that the trend should continue, as it does. If you spot this pattern and choose to take on a long position, you can ride the trend for a nice profit. You can also put on a long position knowing that you need to either get out of the trade on the appearance of a bearish reversal signal or some sort of trend break.

The tasuki gap fails to indicate more bullishness

I'm fond of the upside tasuki gap pattern, but it certainly does have, well, a downside. Have a look at Figure 9-27 for an example of what can happen when the upside tasuki gap turns out to be a dud.

Figure 9-27:

The upside tasuki gap offers a bad signal on a chart of FedEx stock.

Figure 9-27:

The upside tasuki gap offers a bad signal on a chart of FedEx stock.

The chart in Figure 9-27 is for the stock that represents ownership of FedEx Corporation (FDX). This is another stock that I love to trade, for a few reasons. First, on the business side, FedEx is exposed to the energy markets on the cost side of its business and the overall economy on the income side. As a result, it proves itself to be a very volatile (and fun to trade) stock. Second, the first industry for which I was ever given investment responsibility was transportation, and FedEx (Federal Express at the time) was an early company in my coverage. Finally, I grew up in Memphis (FedEx headquarters), where everyone knows someone at FedEx. Needless to say, the company is close to my heart.

On to the chart. During a well-defined uptrend, a long white candle appears on the chart, and that forms the pattern's first day. It's actually laying on a support line, which would be considered a bonus in this situation. I include a trendline on the chart. The second day is an up day, and a gap between the first and second day is created. Finally, the third day is a down day that encroaches but doesn't close the gap.

The pattern looks like a winner, and the failure takes a while to occur. But note that the low of the first day is violated — a sure sign of failure in this scenario. To introduce another possible level of failure, I also extended the trendline out to where the failure occurred. You can use this line as a stop that adjusts as time moves along. That's just another one of the countless ways you can exit a position when the theory behind the trade is no longer valid.

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