Sometimes a gap or window is required to demonstrate that the price move is picking up steam. Otherwise, the move may not create any signs that a move is forming. The best illustration is the Dumpling Top. The slow curvature of the top would not attract any attention. However, being prepared for a gap down allows the investor to make profits that otherwise would just blend into the trend with no great expediency needed. Figure 18 illustrates the Dumpling Top. The Gap is the crucial sign in this pattern. Once the gap occurs, the downtrend should prevail for a number of days. Prior to the gap, there is so little price volatility, nobody would be interested in what was occurring in this stock. The Candlestick investor gets a forewarning of a profitable trade.
Figure 18 - Dumpling Top.
Note in Figure 19 - CMH, Clayton Homes, Inc., that the trading became listless until the gap down instigated a sell off.
Figure 19 - Clayton Homes, Inc.
Just as the gap down is the main initiative for expecting the downtrend after the Dumpling Top, the same is true for expecting an up-move after a Fry Pan Bottom. The Fry Pan Bottom gets its name from the slow gradual curve made at the bottom of a trend. This provides a lot of time for the sentiment to change from bearish back to bullish.
Figure 20 - Fry Pan Bottom.
As the change becomes more bullish, the bulls feel more confident that all the selling is gone. This leads to some exuberance into getting back into the position. Upon witnessing this gap up, the Candlestick investor should be willing to commit funds as fast as possible. It usually signifies the beginning of a new trend.
Note in the New Focus Inc. chart, Figure 21, how the bottom slowly curved back up as the selling diminished and the buyers began to build confidence. The small gap up on the ascending side of the Fry Pan alerts the investor that the buying is now getting more enthusiastic. This is the spot that a Candlestick investor wants to commit funds to grab some of the 100% gain over the next few weeks.
Having the foresight that the slow curving moves are not just dull market conditions creates an opportunity for the Candlestick investor to be ready for that telltale gap. Once the gap appears, putting money into that trade maximizes the returns by being in the trade as it is now moving.
Next..............San-Ku - Three Gaps Up