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Ask Tony
Wednesday May 2 nd, 2007
by Tony Golan
Chief Technical Analyst
StockProfit.com™
Question:
Tony,
I am Long RIO in my new IRA account with 100-shares at $40.93. I want this to be a long term trade 12-month plus.
- This morning it gapped down a little at the open and traded down to a close of $41.50. You mentioned in a previous post that a large GAP down is usually followed by more - Tuesday, April 24, 2007 - Trading the Big Gap-Down in UCTT - should I be concerned with this GAP down or is it a normal correction?
- Looking at this chart would you tell me where my current stop should be placed as I am guessing it should be at $35.71 - .03 from the correction on 3/28/07?
- Can you explain what the term "Filling the Gap" or "Back filling" means and the basis behind it. For example is the small gap down today somehow "filling the gap" or "backfilling" the gap up at the open on 4/25/07? It looks like you could literally cut and paste the section of the chart out from 4/25/07 open and the open today on 4/26/07 and then move this section of the chart down and re-connect the prices so that they flowed together to get a better idea - albeit the 4/25/07 high would be less by a proportional amount.
Thanks you.
Dave
 Zoom
Tony answers:
Dave
- You must distinguish between common gaps and disaster gaps. I was talking about disaster gaps, and the "gap-down" you're talking about from last week was a common gap. RIO is a foreign stock and as such, it experiences common gaps very frequently. Just look at the attached chart. Foreign stocks and ADRs are like that. Don't make too much of it.
- The "correction" on 3/28 did NOT come after a new high, and is therefore not a correction at all. An intermediate-term stop should be set at 31.08, .05 below the low from 03/05, below which I drew the blue horizontal line.
- A gap-down is when a stock opens below the previous day's low. That means if a stock goes down to 30 and closes there, then the next day it opens at 27, now you have a gap in prices between 27 and 30. "Filling the gap" refers to the stock's tendency to come back up to 30, "close the gap", and resume the decline.
That having been said, "filling the gap" is only a tendency, NOT a certainty. I've seen MANY gaps that have either never been filled or were filled so many years later that no one other than me remembered the gap. Don't waste too much time on worrying about whether stocks will fill the gap or not.
-Tony.
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Tony Golan
Chief Technical Analyst
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