Another three-candle pattern that accounts for gaps, the tasuki gap pattern isn’t quite as useful as its gap filled cousin. The stock market prefers its gaps be closed, and if one remains open, it tends to exert a subtle pull on the price action. The gap filled pattern removes this influence but the tasuki gap does not, and therefore this pattern’s long-term may be muted in comparison.

The tasuki gap is the gap filled pattern in a “lite” version, as the third candle doesn’t quite close the gap. As with most candlestick patterns, there’s a bullish version and a bearish one. With the upside tasuki gap:
•    first comes an ascending (white or clear) candle,
•    followed by another ascending candle that gaps higher on open, and
•    finally a descending (red or black) candle that opens within the second day’s trading range, but can’t quite trade down sufficiently to close the gap.

In this pattern, the bears can’t exert sufficient selling pressure to fill the gap, and therefore the bulls seem solidly in control. However, the gap remains behind, at least overnight, exerting that pull on the price action and providing a tempting target for commercial traders. As well, the micro-retraction in the micro-trend formed by this pattern may not be 50%. In an uptrend, the upside tasuki gap signals continuation, but in a downtrend or ranging market, it may indicate a reversal.

Its opposite is the downside tasuki gap:
•    it begins with a descending candle,
•    which is followed by another descending candle that gaps down, and
•    ends with an ascending candle that opens in the second candle’s trading range but isn’t successful in closing the gap.

In a downtrend, the downside tasuki gap signals continuation, in an uptrend or range reversal. The reversal may not be the full 50%, and because the bulls could not close the gap, the bears feel in command although the gap’s pull remains.

Below is an example of the downside tasuki gap:

The downtrend was gaining momentum when, on 6 May, a descending candle formed, followed by another with a gap between them. The third day formed an ascending candle, but despite the bulls’ best efforts they could not quite close the gap. Although the fourth day’s trading did, resistance had been set at 26.00 and the price proved unable to force through that level, returning the initiative to the bears as the downtrend continued.

For trading this pattern, the extreme price point of the first day’s candle serves as the important technical level, e.g., the low for the upside tasuki gap and the high for the downside one. Should the price action breach that level within the next few trading days, the market entry signal is invalidated and any open positions based upon it should be exited.

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