All Gaps must be rated as a Tier I, II, or Tier III Gap which is a measure of "Shock Value". Here are the five points to rating gaps in the market...
- Did the gap clear Support or Resistance? Ex. Such as a pivot or base on the 60 minute or Daily Daily chart.
- Does the short term pattern get a point? Ex. Gaps over a wide range bar in the opposite direction (ex. gaping over a previous days red bar), AKA Mortgage Gap/Monster Gap. Could be a series of same narrow range bars. Most important question, does it create "Shock".
- What has happened in the long term pattern, meaning the daily and weekly charts, is it a Pro or Novice gap? If Pro, it gets the point. or gaping from a base gets the point...
- Does the gap have relative strength or weakness that correlates to the way the stock will be played Vs. the Market (QQQ, SPY). Ex. Market gaping up and your stock is gaping down, the stock gets the point.
- Is the size of the gap so large that it destroys the technical pattern? No, gets the point...
Pro Gap - Gaps up or down and reverses the previous trend.
Novice Gap - Gap up or down in the same direction as the previous trend.
Gap Disease - Gaps down from a new high.
- Tier I gaps get all 5 points when rating the gap and can be entered Immediately, but best enter over a 1 or 2 minute high. "Gap N Go"
- Tier II gaps get 4 points and can be entered on a buy or sell setup, base breakout, breakdown, 123 patterns, or 5 minute bull or bear 180's.
- Tier III gaps get 3 points and can only be entered on a 15 minute buy or sell setup and best played later in the afternoon or the following day. No credit is given to the gap and any play must come from the quality of the intraday pattern.