US markets must be closed today coz I'm replying !
There are several types of gaps (up and down they carry same implications for the trend direction)
Most common gaps are break-away and exhaustion gaps. Break-away gaps appear as the sentiment swing kicks in and resistances are broken. This is especially so when a group of resistances are broken. These gaps appear with commensurate volume build and momentum and leave little, if any, doubt of the trend direction and generally happen within the strongest part of the larger trend degrees for equities(although, not always true of commodities or FX).
Exhaustion gaps are generally capitulation type moves where the last of the crowd races in to get the final move and will be accompanied with a spike in volume but lack the same momentum and relative strength of the break-away gap.
What is important to note is that not all break-away gaps are equal in their own measure and this is true depending on the degree of trend they appear. Gaps are very useful for confirmation because they can belie the part of the pattern the trader is looking to confirm. For example if you see the pattern entering a phase that should be extremely robust and the most powerful in the larger degree trend then a break-away gap will immediately give the greatest weight to that view. You should be aware to not confuse a media event gap movement for trend movement as most patterns tend to act differently to each. An event driven gap will get back-filled very fast so you may want to wait for the fill to enter in the direction of the larger trend direction. A gap that is internally driven (impulsive) may take considerably longer to back-fill as the pattern must reverse of its own "time", its own cycle. Very rarely do gaps NOT get filled and they can act as a magnet on a pattern. A trader should learn to interpret the whole pattern structure before attempting to act on what a gap move may procure as gaps are merely resultant of the pattern and NOT causal of direction. If nothing else gaps merely reflect the underlying strength of the trends sentiment, that is, how extreme at that point, the cycle calls for the action to appear.
A gap-down in the SPX (S&P 500) at a high was a good clue that the pattern would return and likely pass the gap-down from the high at 1245 (02/08/05) and this gave a good clue that whilst many thought the index was on its way in a bear trend the gap-down gave a clue that the pattern was not finished upwards. GOOG is another example of a manic chart with good break-away and exhaustion gaps and a trader that is patient can reap well. I have often heard traders refer to break-away gaps as confirmation gaps ad I think that's a very good way of labelling them.
Daily pivots are a very short-term and often short-sighted calculation based on the previous sessions values. The main challenge with this calculation is that the underlying trend strength or time value is not included in the pivots. Whilst the calcs are good probability calls they don't consider other issues that may effect the trends action. For example a taking the previous gap-down in the SPX at 1245 the previous sessions pivot calcs would have been fairly useless from trending pov. However, a pivot calculation based on Fibonacci ratio and time value and momentum study would be a different story and would likely confirm at least one of the probable session/session pivots but then to get that confirmation the trader would have had to await the completion of the session to know. In essence there is an immediate limit to the value of knowing daily pivots and certainly would could not extrapolate the strength of the next move and at best they serve well when a pattern smoothly trending in the one direction. Frankly they are for experienced traders who tend to be quick on their toes and use them as a secondary tool.
This is an opinion.
Good hunting.
Cheers.
Julian
