Stock Gap
A stock gap is an area discontinuity in a security's chart where its price either rises or falls from the previous day’s close with no trading occurring in between. Gaps are common when news causes market fundamentals to change during hours when markets are typically closed, for instance, an earnings call after-hours.
Definition: A stock gap refers to a discontinuous area on a security's chart where the price jumps directly up or down from the previous day's closing price without any trading occurring in between. Gaps typically occur when news changes the market fundamentals during times when the market is usually closed, such as during post-market earnings calls.
Origin: The concept of stock gaps originated in the field of technical analysis. As early as the early 20th century, technical analysts began to notice these discontinuous areas on price charts and attempted to predict future price movements by studying these gaps.
Categories and Characteristics: Stock gaps are mainly divided into four categories: common gaps, breakaway gaps, runaway gaps, and exhaustion gaps.
- Common Gaps: Usually occur in markets with small price fluctuations, lack significant market meaning, and are often quickly filled.
- Breakaway Gaps: Occur when prices break through important support or resistance levels, usually accompanied by high trading volume, indicating that prices will continue to move significantly in the direction of the breakout.
- Runaway Gaps: Occur in the middle of a price trend, indicating that the current trend will continue, usually accompanied by moderate trading volume.
- Exhaustion Gaps: Occur at the end of a price trend, indicating that the current trend is about to reverse, usually accompanied by low trading volume.
Specific Cases:
- Case 1: A company releases better-than-expected earnings after the market closes, causing the stock price to gap up significantly at the next day's open, forming a breakaway gap. Investors can observe the trading volume and subsequent price movements to determine whether the gap will be filled.
- Case 2: A stock experiences a runaway gap during a sustained uptrend, indicating strong bullish sentiment in the market. Investors might consider buying near the gap to follow the trend.
Common Questions:
- Will gaps always be filled? Not necessarily. While many gaps eventually get filled, it is not a certainty. Investors should analyze other technical indicators in conjunction.
- How to determine the type of gap? The type of gap can be determined by observing the trading volume and price movements when the gap occurs. Breakaway gaps are usually accompanied by high trading volume, while exhaustion gaps are accompanied by low trading volume.
