Gaps are a frequent occurrence in the price of stocks. That's because they're closed for most of the trading day. Sure they have extended hours trading, but most people only look at the cash session. As a result, the movement that occurs overnight has an impact on the price the next morning. Even without extended hours trading, news and sentiment shift overnight and the open reflects that order flow wanting to be filled. While gaps are frequent, different types of gaps provide more significant indications of a change in trend, continuation of the existing trend and the stage that the trend is in.
Let's take a closer look at Breakaway Gaps.
Breakaway Gaps Basics
Overall Rating: 3 Star
Directional Bias: Non-Directional
Pattern Type: Reversal
Pattern Description:
This pattern can be bullish or bearish and typically occur at the outset of a new trend following a consolidation phase. Following the gap, the price continues to rising to form higher highs and lows.
Volume Description:
Volume tends to be significantly higher on the gap day versus the previous day and continues to be elevated for several days.
Breakout Confirmation:
A breakout from a consolidation and a continuation in the price movement in the direction of the move following the gap day.
Measuring Technique:
The expectations for movement is based on the price making a move that is two times the size of move to the high gap day.
Statistical Notes:
These patterns generally don't close quickly, often times taking six months or longer. Larger gaps tend to perform better than smaller ones, and formations that occur near a 12-month high or low perform better.
Conclusion
identifying gaps at the beginning of trends can be important indications of a trend reversal. Seeing these types of formations will improve your efficiency entering after a large move and will help differentiate between gaps that occur at the end of a trend and one that occurs at the beginning.
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