Tuesday, September 25, 2007

Rest Stop Ahead




Exhaustion Gaps
StockCharts.com
Exhaustion gaps are those that happen near the end of a good up- or downtrend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day's close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume.

It is almost a state of panic if the gap appears during a long down move and pessimism has set in. Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise, if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up. Prices drop, and a significant change in trend occurs. Exhaustion gaps are probably the easiest to trade and profit from. In the chart, notice that there was one more day of trading to the upside before the stock plunged. The high volume was the giveaway that this was going to be, either, an exhaustion gap or a runaway gap. Because of the size of the gap and the near doubling of volume, an exhaustion gap was in the making here.

Despite our wishes to the contrary, it may be time for the Precious Metals and their mining brethren to pause here, catch their collective breath, and consolidate some of their mighty gains achieved over the past six weeks. This should be considered a "normal" development, and an opportunity for traders to look to book some short term profits before we move higher into the Fall.

Continued weakness in the Dollar should limit any imminent pullbacks here, but the Dollar is very oversold here and da Vermin of the Comex are always looking for a sucker punch opportunity. Protective stops are well advised for those sitting on hefty profits here.

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