Spotting opportunities with Runaway Gap and Bollinger Bands
As always, the first step when performing a technical analysis, is to identify the trend of the stock or financial instrument you intend to invest in.
Based on the chart below, the stock is showing an uptrend, with a “gap up” in early December last year with volume surge.
In this article, we will discuss about the “gap”, which is a simple approach to buy or sell stocks, together with the Bollinger Bands.
“Gap” happens when the opening price of the stock moves sharply up (“gap up” pattern) or down (“gap down” pattern) compared to the previous day’s closing price.
As you may observe from the chart, there is a large difference in the opening price (as shown in the arrow) than its previous day’s closing price.
As the “gap” occurred near the middle of the identified trend and continues its uptrend, it can be classified as “Runaway Gap” (or “Measuring Gap”).
Most often, “gap” happens due to significant news that caused the fundamentals of a company to be changed.
Based on this example, the news had a positive effect on the company’s outlook and attracted buying interest suddenly.
Currently, the share price of the stock is supported at the trendline (blue line), as well as 20-day moving average (the middle line of the Bollinger Bands).
Bollinger Bands comprise of upper band, lower band, and 20-day moving average.
Bollinger Bands can be very useful tools, as it is believed that the stock price tends to stay within the upper band and lower band.
You may notice that the upper band and the lower band are narrowing; this suggests that the volatility of the price change is decreasing.
As long as the trend can hold, if the price falls below the lower band, it may represent a buying opportunity.
In short, the stock price is currently at the support level at trendline and 20-day moving average.
As the bands are narrowing, it means the stock price is trading in a narrow range and losing volatility, suggesting that the demand and supply are in a fine state of balance.
Buying opportunity occurs if the price falls below the lower band on the condition the current trend continues.
You may use other technical indicators to complement the investment decision.