Gaps
Gaps occur because
- Good / bad earning announcements that are different to market expectations
- News / Geopolitical events
- Overall market sentiment
- Order imbalances - big buy/sell orders
- Rumours - company partering with another company, leaked info
Types of gaps
Common gaps
- Appears in a weak or calm market
- No reason or catlyst to the gap
- Often filled quickly
Breakaway gaps
- Price suddenly breaks a a well defined structure (support or resistance)
- Usually confirms a breakout
- Usually comes from news or big events
- Happen at the end of a consolidation pattern or range & usually mark a new trend
- Usually follows with a significant increase in volume
- Do not fill quickly
- Usually cause by:
- Earning reports (Exceed or fails to meet expectations)
- Regulatory changes
- Market sentiment
- Geo-political events
Runaway gaps (continuation / measuring gaps)
- Appears when the market is gaining or falling qucikly
- Signals buyers or sellers dominant
- High probability of continuation
- Usually not filled
- Followed with high volume
- Usually in the public participation
Exhaustion Gaps
If you gap and the pivot within a few days, then it't most likely an exhaustion gap
- Occur near the end of an existing trend, after appear after a prolonged price movment
- Usually occompanied by a spike in volume - the final rush before the trend reverses
- Exhaustion gaps are likely to be filled quickly as the market corrects and reverses the previous trend
- Signal a high problability of a trend reversal
- Can be used to enter a trade in the opposite side - exhaustion gap at the bottom, might be a good time to enter
- Eveything usually looks very overbought