Gaps and Gap Analysis
- Price charts often have blank spaces known as gaps.
- They represent times when no shares were traded within a particular price range.
- Up Gap: Today’s Low/Open/Close > Previous Day’s High/Open/Close
- Down Gap: Today’s High/Open/Close < Previous Day’s Low/Open/Close
- Gaps result from extraordinary buying or selling interest developing due to a change in the fundamentals or the psychology of the crowd.
Timeframe of Gaps
Timeframe of Gaps
- Gaps appear more frequently on daily charts than on weekly or monthly charts.
- Up and down gaps are considered significant when accompanied by higher than average volume.
- Should avoid:
- Intraday gaps
- Very thinly-traded securities
Types of Gaps
- Runaway, and
- Sometimes referred to as a trading gap or an area gap.
- The common gap is usually uneventful (e.g. ex-dividend) and got filled fairly quickly.
- It usually appears in a trading range or congestion area.
- It is doubtful to produce trading opportunities.
- They occur when the price action is breaking out with a high volume of a trading range or congestion area.
- It might take a long time to get filled.
- A good confirmation for the trading gap is to associated with classic chart patterns.
- These are usually happened during (halfway through) the trend.
- Upside Runaway Gaps:
- Increased buying interest, caused by significant news events, happens all of a sudden.
- It represents an almost panic state in traders
- Downside Runaway Gaps:
- This usually represents increased liquidation of stock by traders.
- The price has to continue to drop and gap down to find buyers.
- These happen near the end of a good up- or downtrend.
- They are identified by-
- High volume
- A large price difference between the previous day’s close and the new opening price.
- Exhaustion gaps are quickly filled as prices reverse their trend.