Gap-down patterns are also known as falling windows. They’re bearish. Gappers are blank windows that form because something happened after hours and pre-market that caused the price to open lower than the previous day’s close. Gap-down patterns can be found on many stock charts. The gap-down pattern occurs when the price opens lower than the previous day’s close. Gaps are key support and resistance levels; so, you’ll need to pay attention.
What Is a Gap Down Pattern?
Gaps can occur from poor earnings, unexpected news, unexpected sell-offs, and market moves, which can cause a trader to make a spur-of-the-moment decision. Trading emotions are where Japanese candlestick patterns come from. Greed and fear, or supply and demand, move markets. Candlesticks are a way traders can gauge those moves to get the market’s pulse.
Selling power was pretty extreme in the after-hours and pre-market trading, causing supply and demand to go out of balance. Gappers let you know that a trader’s view has changed overnight.
News can move markets as well as earnings when stock trading. Earnings reports come out after the market closes. So sometimes, even with good earnings, a stock can gap down.
Many traders use the gappers strategy as key support and resistance levels. They will get filled. It might not be right away, but gaps do fill.
When looking at a chart with a gap, notice that the two candlesticks forming the gap act as support and resistance. When a gap occurs, the overall perception at that time is a bearish one.
The Bulls will try to fill that gap, but it may take a while. Be aware of the key levels of support and resistance the gap provides.
At the BullishBears, we teach how to trade candlesticks and what they are on our daily live streams.
Gap Down Pattern Time Frames
Gappers are easier to find on daily charts, but can be found in any time frame. This is because it’s easier to form gaps daily than in any other time frame.
Also, find them on intraday charts, but they indicate how a trader feels about a stock on a daily chart. Gaps are rare on weekly and monthly charts.
A weekly chart can only have a gap when Monday opens lower than the previous Friday and then proceeds to trade lower the rest of the week. Likewise, a monthly chart would be when a month begins lower than the previous month’s close and stays that way.
When there are gaps in thinly traded stocks, that is more indicative of normal volatility than a trader’s view of the stock. As a result, those are much riskier to trade and should be avoided.
Using Technical Analysis
Gappers form key levels of support and resistance. That’s why being able to read candlesticks is so important. The wicks and real bodies form those important levels.
Technical analysis, such as moving averages, MACD, and RSI, is important when a stock trades in a gap. They can help you determine its direction, whether up or down.
The simple moving average can also form important buy and sell signals. These tools paint a picture of trends and direction, including gap-down patterns.
The gap shows traders were quite panicky, holding long after a massive run-up. Things get messy once a stock makes a “middle finger pattern” daily, with many gaps.
Final Thoughts on Gap Down Pattern
Candlesticks group together to form patterns over time. Viewed as bearish candlesticks and other candles form patterns that traders know about.
Traders are creatures of habit and will always trade patterns, support, and resistance. Candles tell a story and paint a much clearer picture when coupled with patterns and technical indicators.
