Stock Market · Technical Analysis

Gaps

What is a price gap?

A gap occurs when a stock opens significantly higher or lower than the previous day's close, leaving an empty space on the chart with no trading activity. Gaps happen due to news, earnings, or major macro events released overnight.

Three types of gaps. Each with different meaning

1. Breakaway Gap

Occurs at the beginning of a new trend, breaking out of a consolidation area or key resistance/support. Signals the start of a significant move.

• Often on heavy volume
• Usually doesn't get filled quickly (price doesn't return to pre-gap levels soon)
• Breakaway gaps above resistance = strong bullish signal

2. Runaway Gap (Continuation Gap)

Occurs in the middle of an existing trend, the trend is so strong it skips over price levels. Think of it as a 'measuring gap', it roughly marks the midpoint of the total move.

> A runaway gap tells you the trend has significant energy left. Use it to estimate the price target.

3. Exhaustion Gap

Occurs near the END of a trend. Looks like a continuation gap, but it happens after an extended move. Often followed by an island reversal pattern. A cluster of candles isolated by gaps on both sides.

Volumeis the key to telling gaps apart: breakaway and runaway have high volume; exhaustion gaps often see declining volume

Gap filling

Markets have a tendency to eventually 'fill' gaps. Return to the pre-gap price level. Exhaustion gaps fill quickly. Breakaway and runaway gaps may take much longer, sometimes months or years.

Trading gaps

• Fade exhaustion gaps (trade against the gap direction. Sell into a gap up that looks exhausted)
• Trade with breakaway gaps (buy above resistance gaps, sell below support gaps)
• Never blindly trade runaway gaps. Let the trend continue and wait for a pullback to the gap area

Takeaway. Breakaway gaps start trends. Runaway gaps continue them. Exhaustion gaps end them. Volume is the key to telling them apart.