Gaps are a sign of excess. They are formed between two bars on a chart – represented by a space between the close of one bar (daily or weekly) and the open of the other bar. Gaps occur because investors are so excited (positive) that they bid prices higher than yesterday’s close right from the get-go. Or, they form when investors are so utterly fearful that they sell despondently from the start of the trading day. They just don’t care what price they have to sell at – hence the gap between the two days.
In looking at the various world markets charts, I have noted a highly unusual number of gap-ups on these indices. Incredible to see so many indices across the world bidding up so quickly – all at the same time – to form gaps. Gaps tend to form, as noted above, when investors are hyper bullish (gap-ups) or hyper bearish (gap downs). In this case, we are looking at gap-ups, a sign of exuberance.
Gap-ups can actually be a bullish sign. They can indicate a break-away from an area of congestion. However…As a contrarian investor, any hyper bullish attitude by investors tends to concern me. Especially when its so widespread. A gap is often “filled” when the market re-evaluates its excessive bullishness or bearishness. When market players feel the stock or stock market index has moved a bit hastily (to the bullish or bearish side), traders often swoop in and buy into the selloff , or sell into the euphoria. This “fills the gap”.