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Gap Down In Price Is Not Always Bad; Here’s Why

In a bear market such as the one in 2022, who wouldn’t easily tune out the market action? But the stock market is and always will be a contrarian animal. That’s why even during sharp declines — including a gap down in price — you can still gain insight into what institutions are doing with future big winners.




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Let’s analyze the “negative action” in stock market leader ConocoPhillips (COP) as it got pounded during a seven-week decline in the summer of 2021. A daily chart showed why gaps down in price are not always bad.

Gap Down In Price: The Basics

First, what is a gap down in price? It emerges when a stock falls so sharply that the highest price in a given day stands below the lowest trading price in the previous session. COP did exactly that on July 19, 2021, sinking 3.2% in heavy turnover (1). That day’s peak of 54.30 stooped well below the prior session’s low of 55.31. That’s a 1.01-point gap down.

Bearish action, right? Indeed, but it was normal action too, considering the oil and gas explorer was just starting to carve the left side of a new base. Another gap down took place on a 2.1% drop on Aug. 16 and three sessions later on a 2% shellacking on Aug. 19 (2).

Something interesting happened on the July 19 and Aug. 19 gap-down sessions, however.

The stock closed in the upper half of each day’s trading range. The pattern recognition function on MarketSmith noted the stock showed a closing range percentage of 59% and 66%, respectively. A closing range figure higher than 50% hints at bullish action. Why? Some fund managers saw the gap down in price as an opportunity to pick up shares at lower prices. Their buying prevented the slide from getting worse.

Also notice how ConocoPhillips refused to stamp below its long-term 200-day moving average, a key technical level of price action. Institutions that favor a stock may see an opportunity to grab shares when it’s trading at or near its average price over the past 200 days, or roughly 10 months’ worth of action.

ConocoPhillips bottomed after a mild 19% decline from the base’s high to low. The stock completed an 11-week cup without handle. On Sept. 23, shares pushed past a 63.67 buy point and never looked back.

The stock logged seven up sessions in a row, each in above-average turnover during the breakout. Funds were essentially falling over themselves to accumulate stock. By Oct. 25, COP had rallied 22%. That was quite a change in behavior after its last gap down in price. One could have sold into that rally for a nice short-term gain.

Another base formed, and the Houston-based energy play broke out again at 78.08. Since then, shares have rallied as much as 77% from this second breakout point.

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