Gap Fills: What You Need to Know
- A gap in the chart is when a security moves sharply up or down with very little trading in between.
- Gaps can be created by an earnings report reaction, a piece of news, or something in the macro.
- Gaps are easier to identify with candlestick charts than with line charts. A gap is simply any empty period between the top and bottom wick of two adjacent candles.
- A gap becomes "filled" when the price action returns to trade inside the empty area, touching both the bottom and top of the range.
- Gaps in the chart fill 80% of the time. Because of this, gaps act as a magnet, drawing short-term traders to chase that area as a price target.
- After filling, gaps typically reverse, at least temporarily. After the "target" gap has been filled, the same short-term traders who drove that momentum typically exit their positions, reversing that momentum.
- For more information about gap fills, including a video explanation from a licensed CMT, check out this free article.
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Unfilled Gaps in Tesla Stock
On September 21st, Tesla traded as high as $313.80. Suddenly, Market Rebellion began identifying a slew of bearish unusual option activity in far, far out of the money Tesla puts. By November 22nd — just two months later, shares of TSLA traded as low as $166.19, and the smart money's bearish premonition had proven to be accurate.
As the pace of Tesla's race to the downside continues to accelerate, the stock is nearing a very large gap.
As stated above, gap fills can be somewhat of a self-fulfilling prophecy — as a stock nears the level, short-term traders join in to try brace for one of those "8 out of 10" probability moments.
In this case, (TSLA) has four large gaps all the way down to $43.47 — and one ($144.34 - $137.48) that is now within striking distance (roughly 15% away at the time of writing). At the same time, there is one unfilled gap above ($257.50 - $262.47), which is more than 50% away from Tesla's current share price.
There's nothing that says any of these gaps must fill — and considering that some of these have existed since mid-2020, this isn't necessarily a "timely thing" either. However, these unfilled gaps can act as powerful magnets — trading targets that one can utilize when momentum is pushing in the right direction.
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Deep End of the Pool: Chasing Downside in Tesla
With Tesla stock having recently lost nearly half of its overall value, the nearest gap lower looks to be a possible tactical trading target. One could use options, for instance a $150 strike January 2023 long put (which currently costs roughly $7.00, with a breakeven of $143).
Alternatively, you could deploy a long put debit spread at the same date by selling the $135 put against the $150 (which would currently cost roughly $3.00 and provide a maximum value of $15.00), in order to take a defined-risk shot at further downside in Tesla.
While outright shorting stock is an infinite risk maneuver which does not provide leverage, options are effective tools for making bearish bets because they provide a high amount of leverage, and allow you to define the total amount you can lose. However, despite the fact that options provide you the ability to cap your maximum risk, you must still always trade with caution and discipline. That's the number one thing we preach at Market Rebellion.
