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