Be Weary of Gaps
By TheWild1 at 20 June, 2008, 12:01 am, Categories : Financial Markets
I am going to try and simplify a bit of technical analysis here, so lets see how it goes.
Whenever I am looking for some potential stock plays one of the first things I do is check the top movers and shakers. You can do this via Google Finance or anything like that.
There is usually a reason why these stocks are experiencing unusual movement and it could effect not just the stock but others in and/or around its sector.
I basically just generalize if it is good or bad news, then the next step is to look at the chart.
One of the stocks on the list was ArcelorMittal (MT). At first glance this stock has seen great gains over the last few months and a quick glance at the chart might make you believe more is on the way, HOWEVER…
Did you see that gap?
Probably, because I wrote “GAP” in it, but you get the point.
As you can very easily and nicely see the trend line (in blue) runs right with the 50 day moving average (in orange). This set-up almost seems too good to pass up, but then there is that gap.
Gaps usually make there way into stocks on some huge or important news. They can obviously be down or up. In this case, the gap up was sparked by raise in stake of another company blah blah blah. People were pleased with it and a gap happened.
Why Does a Gap Happen?
One of the most popular reasons a gap occurs is when a company is being acquired, bought, or whatever. Essentially one company is paying more per stock than the current value. For example, I will buy Microsoft (MSFT) for $36 a share. That would instantly gap Microsoft’s stock from $28 to around $36.
The same can happen going downwards. Just ask Bear Sterns. Usually when a company seems like they can really not exist on its own anymore or something really bad is surrounding the company.
The problem with gaps is that they usually don’t create any type of support or stability. Just take my Microsoft example. Suppose I changed my mind and chose to acquire Google (GOOG) instead. That could potentially cause Microsoft to gap back down; however, it may not go all the way because a value of $36 has been attached to Microsoft (but thats for a different day).
Back to ArcelorMittal
Towards the top of that chart, that gap up caused a increase in distance from current price to the support (in blue). What this means is that ArcelorMittal could essentially come down into the mid-90’s before anybody even worries about it; however, that could also mean a 11 point change. Is that the risk you want to take?
I would wait for the inevitable fall down before you think about entering into this stock. A simple gap essentially ruined the great play that was ArcelorMittal.
What do you think? Is ArcelorMittal still worth a buy or would you wait for it to come down first?
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