Exhaustion Gaps Explained -- with David Moadel
hey everybody welcome to looking at the markets with David Modell what is an
exhaustion gap and is it tradable I believe it is not by itself you want to
use confirmation you want to use your common sense you want to conduct your
own research and due diligence don't just buy something because a certain
candle pattern happened okay there are other factors involved and these do not
work 100% of the time all right you got to have a plan a plan of action
otherwise you don't know what you're doing and I do coach people so if you'd
like some help putting together a trading or investing plan you can email
me my email address is right there David Modell at gmail.com so let's talk about
exhaustion gaps you know when you get a move whether it's a move to the downside
or an overall move to the upside okay they don't last forever all right as
they say trees don't grow to the heavens alright
in other words even the strongest up move an apple here and this is on
tradingview dot-com it is a daily candlestick chart but the idea of an
exhaustion gap could occur on pretty much any time frame I mean whether it's
a one-minute candlestick chart five-minute one hour daily candlestick
chart like this one or whatever it is you know the pattern is still the same
and it could still apply alright so you know Apple couldn't possibly just go up
day after day forever it's going to get exhausted at some point just like over
here again this is another apple daily candlestick chart and it's going down
down down but it's not gonna go down forever all right I mean it's possible
you know companies go bankrupt in their stock does go to zero but not in this
case with Apple at least not here alright so we'll start with the the
bearish version of an exhaustion gap so you've got there are no any there aren't
any really big gaps here that I see it's just going up pretty continuously and
then a pretty sizable gap here so that sounds bullish right well it depends not
necessarily when you see a gap you don't know if this is going to be a
continuation gap or a breakaway gap as they say you don't know if it's just
gonna keep running upwards or is it going to turn around and go downwards I
mean look at this candle notice how big that upper how long that upper wick is
see that upper shadow or upper wick there all right so that's not
necessarily a good sign yes it gapped up that's bullish okay and you also want to
check the volume I didn't put the volume on here but if if there's a lot of
volume going on there hmm that might make you think on the other hand look at
the size of the upper wick but as far as deciding whether it's an exhaustion gap
or not you got to look at what happens over the next few candlesticks does it
quickly does it soon close that gap yes it did
look at that gap but then didn't take long before it came right back down to
where it was before the gap okay so it basically filled that gap and not in a
good way okay filled it right back down that
tells you that that's an exhaustion gap all right so how do you know it's an
exhaustion gap a bearish one well you had an uptrend and overall uptrend
uptrend uptrend and then a decent-sized gap and then it quickly in the next few
candles closed or filled that gap that is a great time to get the heck out of
that trade if you were long okay if you owned Apple stock though that would have
been a great time to say you know what this is an exhaustion gap I'm getting
the heck out of there I'm taking my profits and running away and guess what
after that down down down I'm not saying that happens every single time this is
not a hundred percent perfect all right but that's just to show you an example
of what an exhaustion gap is especially if it's bearish and again having that
long upper wick there that's another clue
and you want to check the volume as well all right so not all exhaustion gaps are
bearish okay but that's one to look for some people would even take a short
position after that gap is filled that's a little bit dangerous though because
Apple is a good company that tends to go up a lot so I don't know if I would
necessarily recommend you know going short all right
especially for beginners probably you want to go long only most of the time if
you're just starting out in trading now what about the other way around well
again we have Apple here and it's a you know daily candlestick chart again I
just moved it over to a different time all right and look at that overall
downtrend down you know not every single candle is down but it is overall down
down down okay and then a big gap down look at the size of that gap right big
gap down okay but maybe you can't see it so well but this this is a red candle
here not necessarily a great sign you'd want to look at the volume as well which
I did not put on here because it would overlap the candles here if I put the
volume up there but then look what happens afterward if the gap started
here immediately the next four days next four candles went right about here and
it closed that gap okay so that's an exhaustion gap but it's a bullish one in
this case alright so if you were taking a short position and you were doing well
you had a profit and then you saw a gap down you might get excited you might
think oh it's going to be a continuation type of thing but then look at what
happens afterward if it quickly within a few candles closes that gap that is
considered an exhaustion gap at least by the definition that I'm using but this
is a bullish one and these are reversal patterns by the way these exhaustion
gaps okay but you won't know it until it fills it until it fills that gap and
then that would have been a great time to get out of your short position to
cover it okay or maybe even take a long position now don't use this as your only
indicator to take a long position don't just say oh you had a gap down and then
filled it quickly therefore I'm gonna get in no you want to look at other
things you want to look at the news what's going on with Apple okay
there's there a reason for it to turn around alright and you can use other
indicators as well but this does count at least technically as an exhaustion
gap and look what happened afterwards up up and away okay so you could have a
bearish exhaustion gap and a or a bullish one but you won't know
until that gap is filled don't just look at that gap and think well you know this
is going to be exhausting gap you don't know it might be a you know might be a
runaway type of gap continuation that kind of thing you don't know until it
gets filled all right so this has multiple parts to it and again you're
looking at the volume as well all right so that's your basic definition or
examples of you know these exhaustion gaps the move is it's always going to
get exhausted at some point and this could be a pattern to let you know that
that could be in progress always use small position sizes always you know
respect your stop losses if you're using stop losses and stay safe all right and
have a trading plan and that's what I help people with if you want to help
putting together a trading or investing plan again my email address is David
Modell at gmail.com if you liked this video please give it a thumbs up if you
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talk to you again soon