Chart Patterns  |  JUL 2007

Laps And Gaps To Get Your Edge by Larry Connors and Ashton Dorkins

Laps And Gaps To Get Your Edge by Larry Connors and Ashton Dorkins When a stock gaps higher at the open on bullish news, will that lead to even higher prices? When a stock gaps higher at the open on bullish news, will that lead to even higher prices? This is the question that many traders ask before the market opens. You watch the financial news in the morning and hear a list of stocks set to open higher due to positive news overnight. Then you see a live report from the floor of the exchange that shows traders gathered around the post where XYZ stock is traded. You’re told that stock is due to open 10% higher from the previous day’s close. And it’s all accompanied by a great story. If you already own it, you’re probably thinking you couldn’t ask for better news. And if you don’t own XYZ, you may be wondering if you should buy the stock. But… In the final minutes before opening bell, you begin to recall instances in which stocks like this one actually closed lower by the end of the day. How that is possible with such bullish news? QUICK REVIEW OF LAPS AND GAPS Recently, we conducted new quantitative research on laps and gaps. We looked at the relationship between a stock’s opening price and closing price on the previous day. To draw valid conclusions, we analyzed more than seven million trades from January 1, 1995, to June 30, 2006.

by Larry Connors and Ashton Dorkins