Sunday, February 19, 2012

Mind the gap

I'm reading about gap analysis from an article on StockCharts.

Common Gaps

aka trading gap or area gap. Usually uneventful, e.g. going ex-dividend. Unlikely to produce trading opportunities.

Breakaway gaps

"The exciting ones". They occur when the price action is breaking out of their trading range or "congestion area". A congestion area is a ranged sideways movement over a few weeks or more. Breakaway gaps from this range have high volume. The change in the trend has a good chance of continuing. Don't assume that the gap will be filled - it might take a long time.

Runaway gap

aka measuring gaps. High volume. They are gaps that are caused by increased interest in the stock. The confirm that a trend will continue.

Exhaustion gaps

These appear near the end of a trend. High volume. They often indicate the end of a trend. A reversal can occur. The can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume. "Exhaustion gaps are probably the easiest to trade and profit from".


There is merit in saying that common and exhaustion gaps tend to get filled. Holding positions waiting for breakout or runaway gaps to be filled can be devastating to your portfolio, though.

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