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Martha Stokes: Candlestick Charts

Martha Stokes

Martha Stokes


How to interpret Island Gap Patterns

Island Gaps on candlestick charts occur when price is adjusted ahead of the market open. The change of price usually occurs during pre-market activity, as much as 3-4 hours ahead of the open.

Gaps are caused by the following:


1.    Overseas markets which are trading the US based company stock, and close their market at a different price point than the US closed the previous day. This is an arbitrage situation and the US market makers must by law, adjust the price up or down to open at the same price that the stock closed at on the overseas markets. Since Asian Markets open ahead of Europe Markets, and Europe opens and trades ahead of US Markets most gaps are caused by this adjustment.

2.    Excessive orders filling the Queues ahead of market open. High Frequency Trading HFT tends to stuff the premarket queues with orders ahead of the open, with a huge one side sell or buy order status. Thus Market Makers are once again required to adjust price to compensate for the anomaly in pre-market order flow. This causes much larger gaps than the overseas markets, unless the overseas markets have a huge one day gain or loss for that stock.
Gaps are not caused by the following: 

1.    A premarket fill of a Giant Lot or Block order before market opens. Block orders and Giant Lot orders tend to fill at or very near the close of the previous day, as it is the intent of the Giant Institutions buying that large chunk of shares not to move price. That is why these orders show up on the premarket activity briefly then as they are filled, disappear on the premarket activity. The order is of course cleared via the National  Clearinghouses, and is part of the End of Day consolidated data from all 70+ venues which appears in stock charts about 3-4 hours after the official close of the US markets.

2.    Quiet Accumulation also does not cause a gap. Even though the Giant Institutions are buying a giant quantity of shares of stock, the buying is done slowly over an extended period of time via Alternative Trading System ATS platforms also known as “Dark Pools.”

The Island Gap is a unique gap that is harder to interpret, especially if the price is up then down due to the gaps. In the chart example below of Citrix Systems Inc. (NASDAQ: CTXS) there are 3 island gaps. 

The name “Island Gap” represents the visual “look” on the candlestick chart, which appears to be an “island” of price data separated from the prior trend.
Island gaps require more than just Price and Time indicators to accurately assess what is going on, and why the gaps are forming. In this instance these gaps are caused by premarket HFT order flow which can be a news feed, social media retail crowd interest, or even a MACD crossover trigger.

HFTs trigger orders automatically on a variety of computer generated order flow. In this instance, Volume indicators all show weakness in the most recent run up.
There is a lone huge HFT spike in Volume on the chart indicated by the green arrow which reveals that although HFTs attempted to sell the stock down on that day, heavy buying was occurring on ATS platforms which held the stock at its current level.

Trade Wisely,
Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com