How to Identify Stock Gaps

Stock gaps (in English, gap) are jumps, bullish or bearish, that the quotation of a financial asset suffers as a result of no buy-sell transaction having been crossed.

When we analyse a graph and see a gap, the technical analysis, within stock analysis, tells us that, based on the chartist analysis, we are facing a figure of great relevance in the world of trading and, especially, of chartism.

gap fill stocks

A stock gap or gap, in a chart, is the imbalance that occurs between supply and demand, which gives rise to a sudden jump in the quotation that breaks the chart. In an upward trend, for example, seeing a gap indicates that current prices are well above the maximum recorded in the previous session. In a downward trend the same happens, but indicating that prices compared to the previous session have fallen sharply without any trades being crossed.

And now the question is: why does this happen?

In this line, we must point out that we usually find a gap when, having closed the session, news that affects the company notably, for example, is published.

Depending on whether this news is positive or negative, the news could trigger demand, as well as supply. However, since the session is closed, we must wait until the next day to be able to execute all orders. Therefore, when the session opens the next day, due to the new market situation, which is not the same as the one we had in the session of the previous day, it will open with a gap.

gap trading

Essentially, we are talking about a pattern that draws the chart of a certain asset, which suffers a jump in the quotation as a result of orders not having been executed at certain price levels. In this way, the price rises or falls suddenly, breaking the continuity of the chart.

👉 Find out more about: chart patterns

Types of gaps or stock gaps

In trading, usually four (4) types of stock gaps or gaps are distinguished.

The types we mention are the following:

  • Common gap or gap: The common gap is one that occurs within a price formation, either of continuation or of change.
  • Break or escape gap: Break gaps appear when an asset is in range or lateral trend and breaks the support / resistance to start a lasting trend and with some strength. At that moment, the interest in the market is high and the volume of trading increases. It is very common for this type of gap to close before the trend begins, which usually implies the formation of a pullback.
  • Continuation gap: Continuation gaps appear in the middle of a trend as a result of the appearance of some information that affects strongly in the same direction as the trend. This increases the interest of speculators and investors, causing a strong increase in volume.
  • Exhaustion gap: An exhaustion gap appears just before a trend ends, when the weakest investors and speculators start taking positions, being already too late for them. Exhaustion Gaps are characterized by being wide and having a strong volume. When they occur they usually close quickly and that is when we should take positions.

How to interpret a gap or stock gap?

Finally, once we know what a gap is and the types that exist, what we have left to know is how we can interpret this in the market, in case we see a gap.

We have answered this in the previous section, when we were looking at the types, because we must point out that depending on the one we are talking about, the causes and consequences can vary greatly.

But in addition to what was mentioned and commented on in the previous section, we must point out that when interpreting a gap, the best strategy is to identify what has motivated the formation of said gap.

If the gap has been caused by news that has substantially impacted the company's quotation, the news itself can give us more details about what will happen than the gap itself. Knowing the cause, we can identify consequences and perhaps predict similar movements in the short term.

In any case, there are situations in which we cannot know the causes, so we will have to go, depending on the type of gap, to the interpretation that tells us the technical analysis and that we reflect above.

And it must be said, to finish, that we are talking about a figure of great relevance, which we usually find frequently in day trading and financial markets.

👉 You may also like our article on how to use the VWAP indicator to make better trading decisions.

FAQ

Can the interpretation of a stock gap provide insights into future market movements?

While interpreting a stock gap, it is essential to consider its underlying cause and the specific type of gap observed. Understanding the cause helps in making more informed short-term predictions.

How often do stock gaps get filled?

While no guarantee exists, approximately 63% of stock gaps get filled within a few days. Common gaps, formed by normal trading, are most likely to fill, followed by continuation gaps in established trends. Breakaway gaps, associated with new trends, have a lower filling probability, and exhaustion gaps, signalling trend reversals, have the least likelihood of filling.

Can stock gaps act as support or resistance levels in the future?

Yes, stock gaps can act as support or resistance levels once they are closed. When a stock gaps up, the previous gap becomes support, and if it gaps down, the previous gap becomes resistance. Traders often watch these levels, as they can provide valuable insights into potential future price movements.

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