A stock gap is an area on a technical chart where an asset’s price jumps higher or lower from the previous day’s close, leaving a gap between the two price points. These gaps are significant in technical analysis as they can indicate strong market movements and potential future price directions.
Types of Stock Gaps
Technical analysts categorize gaps into four primary types:
1. Common Gaps
Common gaps typically occur in the absence of significant news and during low trading volume. They are temporary and often fill quickly, meaning the asset’s price returns to close the gap within a short period.
2. Breakaway Gaps
Breakaway gaps form at the beginning of a new trend and signify a strong price movement. They occur when an asset breaks out from a consolidation pattern or trading range, often accompanied by high volume.
3. Runaway (Continuation) Gaps
Runaway gaps happen in the middle of a strong trend, reflecting sustained interest from traders. Unlike common gaps, they are less likely to fill quickly and demonstrate ongoing market momentum.
4. Exhaustion Gaps
Exhaustion gaps appear near the end of a significant price trend and suggest that the current price move is nearing its conclusion. These gaps might be accompanied by a decrease in trading volume and are seen as potential reversal signals.
Examples and Analysis
Example of a Breakaway Gap
Consider a stock that has been trading within a range between $50 and $55 for several weeks. Suddenly, the stock price gaps up to $60 due to a positive earnings report, breaking out of its previous range.
Analyzing a Runaway Gap
In a sustained uptrend, a stock closing at $75 jumps to $80 the next day due to strong buying interest. This runaway gap reinforces the continuing bullish sentiment and indicates further upward movement.
Special Considerations and FAQs
Why Do Gaps Occur?
Gaps occur primarily due to significant news events, earnings reports, or shifts in market sentiment that trigger substantial changes in the buying and selling behavior of traders.
Do All Gaps Get Filled?
While common wisdom suggests that “gaps always get filled,” this is not a universal rule. Some gaps, especially runaway gaps during strong trends, may take a long time or may never be filled.
Historical Context and Applicability
The concept of stock gaps has been integral to technical analysis since the early 20th century. Notable traders like Charles Dow and later, technical analysts like W.D. Gann and Richard Wyckoff, emphasized the importance of gaps in predicting market movements.
Comparing Gaps with Related Terms
Gap vs. Jump
While both terms describe significant price movements, a “gap” specifically refers to the void between the closing price of one day and the opening price of the next, whereas a “jump” can describe any sudden price increase.
Gap vs. Spike
A “spike” describes a sharp price movement within the same trading day, often due to a temporary surge in buying or selling pressure, while a “gap” spans across sequential trading days.
References
- Dow, Charles. Dow Theory.
- Nison, Steve. Japanese Candlestick Charting Techniques.
- Murphy, John J. Technical Analysis of the Financial Markets.
Summary
Stock gaps are essential indicators in technical analysis that highlight significant price movements due to various market factors. By understanding the different types of gaps—common, breakaway, runaway, and exhaustion—traders can make more informed decisions and enhance their trading strategies.
By exploring these gaps in detail, including their formation, significance, and the historical context, this entry offers a comprehensive guide to mastering stock gaps in technical analysis.
