Open Gap

It is common for an index to open at a price different than it closed the previous trading day. When it opens at a price that was never reached the previous trading day the chart produces an open gap between the days' trading ranges. Open gaps are commonly produced by news between trading session that triggers after hours trading in a particular index either up or down in value.

Open gaps are important technical indicators for a chart; a big point being they tend to get 'filled'. Meaning the index eventually returns to trade at the prices left untouched within the gap; but this does not always happen right away.

The chart below contains five gaps in SPY over a four month period. Four of the five were closed while the most recent was being approached. The four closed gaps all vary in size and time before they were closed.



Open gaps can indicate the start of new momentum often triggered by the same cause of the gap itself; the case in gap 1. It is also common for gaps to be filled relatively quickly. This is in the case when the gap is produced from over optimism or pessimism and is then corrected later. The filling of open gaps can also be a case of a self-fulfilling prophecy. Chart technicians are all looking at the open gap and trading accordingly. They know others are also eyeing the same price gap. You can see technical evidence of such in the gaps above:

• The top of gap 2 marks the closing price of the day it was filled
  
• The top of gap 3 marks the highs of the day it was filled
  
• The bottom of gap 4 was the opening price of the day it was filled

Bull Flags

Flag pattern are characterized as trend continuations and obviously get their name from the shape left on the chart.

A bull flag is formed from a strong trend to the upside (forming the flagpole) followed by a pullback trading channel (the flag). If the resistance of the trading channel is broken the original rising trend usually continues. As with all chart patterns, this set-up is not a guarantee a rally will follow. Rather it is common occurrence and used as a technical tool for traders who will a trade with the trend but prepare some defense.


 

Bear Flags

Bear flags share the opposing characteristics of a bull flag. A strong down trend(flagpole) is cut short by a diagonal rising trading channel(flag). The downtrend usually continues once the support of the diagonal trading channel is broken.


 

Spinning Tops

Spinning tops signal indecision and lack of conviction by both bulls and bears. They are characterized by a candlestick pattern with a short body that is vertically centered between larger upper and lower shadows. The spinning tops can be a signal  that the current trend is about to change, could signal a continuation of sideways movement in a chart, or could be a pause in momentum.

Spinning tops are not particularly buy or sell signals but are used to get some insight to how investors are feeling as a whole in an index. The action following a spinning top will be the confirmation to what that spinning top was signaling about the current trend.


 


Head and Shoulders

Head and shoulder pattern are seen at the top of markets and when completed usually signal a longer-term pullback from the peaks. These patterns are seen across days, months, or years.

The pattern is not always perfect but the general idea is a price peak followed by a decline to form the left shoulder. The chart will then reverse the decline producing the neckline at the lows and eventually produce a higher peak known as the head. The price will eventually fall back to test the established neckline where it will again reverse and create a smaller peak than the head and fall back to again test the neckline to complete the right shoulder. Once the pattern is complete it is common for the neckline support to break as support and the chart to break into a downward trend.


 

Without the noise the pattern will ultimately resemble the pattern below when completed:


Inverse head and shoulder patterns will be the opposite pattern and will happen at the bottom of markets and usually break out to the upside like so: