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Understanding Gaps: Common, Breakaway, Runaway, and Exhaustion Gap

What Is a Gap?

  • When a stock ends the day at a certain level and then starts at a new level even though no trades took place.
  • Gaps are usually from one day to the next.
  • The reason is that something within the company or industry can change: earnings report, etc.
  • Weekly charts can also have gaps, but that usually happens over the weekend and it isn’t as common.

4 Types of Gaps

1. Common

  • Likely caused by low trading volume.
  • It will usually be filled (prices slowly revert to that gap).

2. Breakaway

  • More meaningful than common gaps
  • They can happen in the middle of the trading day
  • They have a downward momentum
  • Suddenly the stock dips down below the support line. The gap is between the support line and the dip down. This is due to a change in psychology, and people start to sell their shares.
  • Make sure you see an increase in volume at the gap point. That is confirmation of the downward move.
  • Another way to be sure that the breakaway gap is a healthy gap is if it happens with another pattern (e.g. a descending triangle pattern).

3. Runaway

  • Similar to the breakaway gap
  • Instead of going to the down side it is going to the up side
  • It is basically a stock price jumping up to a new level (typically due to product releases, news events, etc)
  • Anything that creates positive sentiment creates a runaway gap
  • There are three possibilities it can go through:
  • 1. Downard trend and back up, hops and continues to go up
  • 2. Upward incline, gap to incline
  • 3. Downward trend to a slingshot upward
  • Runaway gaps are more powerful when they come out of an ascending triangle or trend line.

4. Exhaustion

  • Very good to trade with, if you watch them
  • They can be dangerous if you are new to the stock market or are not spotting them correctly
  • They happen when a stock shoots up, jumps and continues to trend up, but will eventually decline
  • This can happen with a decline as well (declines, jumps down, continues to decline and then shoots up)
  • You want to be cautious with these gaps because they typically happen in a state of panic
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