Finding Exhaustion Gaps

Running The Stock Screen

This stock screen is utilizes StockFetcher 2.0, the most powerful, programmable stock screening software I’ve ever seen.

Here is a video showing you how to run the Exhaustion Gap stock screen using Stock Fetcher

Here’s the StockFetcher 2.0 program for this screen:
Show stocks where close is above 5
and average volume(30) is above 250000 do not draw average volume(30)
and volume is more than 100% above average volume(30)
and close is below open
and Close-to-open gap is above 5
and Price gained more than 10% over the last 30 days
and MA(30) is above MA(200) for the last 60 days
and draw MA(20)
and draw Bollinger Bands(20)
and draw MACD(12,26,9)
and draw ADX(14,14)

Options
Other than adjusting obvious numeric values, you can also adjust the closing price to say be a doji, or inverted hammer

and close is below open
and close is x% below high
and close is equal to open
and close is equal to low

Validating The Pattern
To trade an exhaustion gap, price must reenter the gap, and stay within the gap at the close. You may chose to place a trade at the close of market, or, wait for a retest of the gap upside resistance (for bearish reversals).

Bearish Exhaustion Gap Examples

Trading Exhaustion Gaps

Exhaustion gaps are reversal patterns. I tend to focus on gaps that are in the direction of the prevailing market / sector trend. For example, if a stock is showing an bearish exhaustion gap (the stock is in a bullish trend), the I look to see if the sector (you can use an etf) is also in an uptrend. I then check to see the strength of the trend using indicators such as the ADX or Aroon, and look to see if the trend is breaking down.

A buy (or short) signal is given when price re-enters the gap. You may want to wait to see if the new support level gets retested before entering the trade.

Indicators That Support Exhaustion Gaps

Any kind of divergence in the MACD, OBV, Accumulation / Distribution are good signals the move is an exhaustion gap. Also, checking the Balance of Market Power to verify if there is institutional buying or selling can help. Any unusual volume in the current expiration month for options opposite the current direction can also be a good signal.

If you are a Marketclub member, you can check the daily / weekly trade triangles to see if there is a change once price reenters the gap.

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