GAP ANALYSIS

Gap analysis is essential tool of technical analysis. Gap appears on charts when there is a important event or news occurs which affects the security. Overnight risks occur when a news or event which affects the security occurs after closing of the market. It has gap impact on the price of security on the next trading day. For example, if an earnings report with unexpectedly high earnings comes out after the market has closed for the day, a lot of buying interest will be generated overnight, resulting in an imbalance between supply and demand. When the market opens the next morning, the price of the stock rises in response to the increased demand from buyers. If the price of the stock remains above the previous day’s low throughout the day, then an up gap is formed.There are 4 main types of charts viz-area gap, breakout gap, runaway gap, exhaustion gap.