Stock Price Gap
Definition of a Gap
A gap is a break between two prices of a stock. This often occurs after a major news event, earnings announcement, or analyst upgrade/downgrade. There will literally be a blank space in the chart where there was a price jump.
A Gap By Any Other Name Would Be as Sweet
Gaps go by many different names depending on variances in how they are caused or how the price or indicators react after the gap. Here are a few.
Common Gap – A common gap is usually caused my normal market forces often breaking up the linear change in the stock price.
Breakaway Gap - A breakaway gap is followed by a strong increase in volume.
Exhaustive Gap – Sort of the opposite of a breakaway gap. This gap is followed by a lower demand for the stock however, it may also have increasing volume.
Run-away Gap – This gap often occurs in line with a price movement with volume similar to current trends.
Can I Make Money With Gaps?
In the TA world gaps are a very useful indicator. It is commonly believed that all gaps get “filled” or the price will return to fill in the prices that were jumped over. Also the gaps we previously talked about help determine future price movement. A breakaway gap is considered the start of a trending price movement in the direction of the gap; the runaway gap is considered a strong sign that the trend will continue; and the exhaustive gap indicates a reversal in the trend.
I personally like to watch for gap movement indications that are in line with my fundamental beliefs on a stock before I buy in.
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