What is a gap?
- Gaps occur because of underlying fundamental or technical factors. For example, if a company’s earnings are much higher than expected, the company’s stock may gap up the next day. This means that the stock price opened higher than it closed the day before, thereby leaving a gap.
- Meaning if Price opens higher or lower than previous day close, it will amount to a gap.
- Open > Previous day close = Gap Up
- Open < Previous day close = Gap down
TYPES OF GAPS
- Breakaway gaps: These are those gaps that occur at the end of a price pattern and signal the beginning of a new trend.
- Exhaustion gaps: These occur near the end of a price pattern and signal a final attempt to hit new highs or lows.
- Continuation gaps: These occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.
- Common gaps: These are those that cannot be placed in a price pattern – they simply represent an area where the price has “gaped.”