Key Takeaways
- Stock gaps show price jumps with no trades in between.
- Four gap types signal trend starts, continuations, or reversals.
- Breakaway gaps indicate strong new trends with high volume.
- Common gaps usually fill quickly and lack trend strength.
What is Gap?
A gap is a visible discontinuity on a stock's price chart where the opening price significantly differs from the previous day's close, creating an empty space with no trading in between. This phenomenon often occurs due to after-hours events like an earnings announcement or major news affecting market sentiment.
Gaps are key indicators in technical analysis and are closely watched by traders such as daytraders who rely on price patterns like candlestick charts to make decisions.
Key Characteristics
Understanding the main features of gaps helps you assess their significance and potential market impact.
- Price Discontinuity: Gaps occur when a stock opens above or below the previous close without intermediate trading prices.
- Volume Variation: High volume gaps, such as breakaway gaps, often indicate strong conviction, unlike common gaps which usually have low volume.
- Types of Gaps: Include common, breakaway, runaway (continuation), and exhaustion gaps, each with distinct implications for price action.
- Technical Patterns: Gaps often coincide with patterns like head and shoulders, signaling potential trend changes.
- Gap Fill Probability: Many gaps, especially common and exhaustion types, tend to fill as prices retrace to the gap zone.
How It Works
Gaps arise when overnight news or events cause traders to rapidly reprice a stock at market open, bypassing prices between the close and open. This often reflects new information unavailable during regular trading hours.
By analyzing the gap type and associated volume, you can infer whether the gap signals a new trend or a short-term anomaly. For example, breakaway gaps on high volume may confirm a breakout, while exhaustion gaps suggest a trend reversal is near.
Examples and Use Cases
Gaps serve multiple practical roles in trading and investing:
- Airlines: Delta stock may gap up following a strong earnings report, reflecting sudden positive sentiment.
- Growth Stocks: Many best growth stocks exhibit gaps during rapid earnings expansions or product launches, signaling momentum.
- Large Caps: Stocks like those featured in best large-cap stocks indexes often display gaps triggered by macroeconomic data releases.
- ETF Movements: Exchange-traded funds can gap due to broad market shifts, as highlighted in our best ETFs guide.
Important Considerations
When trading gaps, always consider volume confirmation and broader market context to avoid false signals. Gaps can trigger stop-loss orders unexpectedly, so prudent risk management is essential.
Not all gaps carry equal weight; differentiating between types helps you decide whether to trade with the gap or fade it. Combining gap analysis with other tools like insider trading activity can provide additional insight into the stock's outlook.
Final Words
Stock gaps reveal critical shifts in market sentiment and can signal either short-term reversals or sustained trends. To capitalize effectively, identify the gap type and align your strategy accordingly, then monitor volume and price action closely before committing.
Frequently Asked Questions
A stock gap is a price chart discontinuity where a stock opens significantly higher or lower than its previous close, with no trading in between. These gaps often result from after-hours news, earnings reports, or other events causing rapid price changes at the open.
There are four main types of stock gaps: common gaps, breakaway gaps, runaway (continuation) gaps, and exhaustion gaps. Each type reflects different market conditions and has unique implications for future price movement.
A breakaway gap occurs at the start of a new trend, often breaking through support or resistance after a consolidation pattern. It typically features high volume and rarely fills, signaling a strong breakout opportunity.
A common gap usually occurs within a trading range without a clear trend or catalyst and is often seen in low-liquidity stocks. These gaps have low volume and tend to fill quickly, presenting short-term mean reversion opportunities but lacking long-term conviction.
A runaway gap appears mid-trend and accelerates momentum in the trend's direction, such as a gap up during an uptrend. It typically has high volume, may partially fill, and indicates strong trend continuation, suggesting holding or adding to positions.
Exhaustion gaps form near the end of a trend when participants begin exiting. They have high but fading volume and often fill afterward, signaling a potential reversal and suggesting traders consider fading the gap.
Stock gaps often happen due to after-hours news, earnings reports, or economic data released outside regular trading hours. These events cause rapid repricing at the market open, resulting in gaps on the price chart.
