Explosions and Corrections in Investment Chart Patterns

Michael N. Kahn, CMT

Sometimes, perceptions in the market change so rapidly that the market seems to explode higher or lower. The extreme form of this action is a market crash, but we can see this rapid shift of perception after takeover announcements or earnings news following unrealistic projections. Rather than a gradual spread of news and market information, it spreads rapidly. This is sometimes exaggerated by news emerging between trading sessions so there was no time for a gradual reaction. As the market opens, all of the pent-up buying or selling is released and the market rockets higher or lower, respectively.

Technicians call these situations gaps because they leave a void on the ...