Basic of Gap analysis

Gap up opening – A gap up opening indicates buyer’s enthusiasm. Buyers are willing to buy stocks at a price higher than the previous day’s close. Hence, because of enthusiastic buyer’s outlook, the stock (or the index) opens directly above the previous day’s close. For example consider the closing price of ABC Ltd was Rs.100 on Monday. After the market closes on Monday assume ABC Ltd announces their quarterly results. The numbers are so good that on Tuesday morning the buyers are willing to buy the stock at any price. This enthusiasm would lead to stock price jumping to Rs.104 directly. This means though there was no trading activity between Rs.100 and Rs.104, yet the stock jumped to Rs.104. This is called a gap up opening. Gap up opening portrays bullish sentiment.
Gap down opening – Similar to gap up opening, a gap down opening shows the enthusiasm of the bears. The bears are so eager to sell, that they are willing to sell at a price lower than the previous day’s close. In the example stated above, if the quarterly results were bad, the sellers would want to get rid of the stock and hence the market on Tuesday could open directly at Rs.95 instead of Rs.100. In this case, though there was no trading activity between Rs.100 and Rs.95 yet the stock plummeted to Rs.95. Gap down opening portrays bearish sentiment. In the following image the green arrows points to a gap down opening.