All the 4 gap analysis is covered. and the conditions for all the gaps are discussed here.
A gap is an area discontinuity in a security's chart where its price either rises or falls from the previous day's close with no trading occurring in between. Gaps are common when news causes market fundamentals to change during hours when markets are typically closed, for instance an earnings call after-hours.
Gaps can be classified into four types. They are Common gap, Breakaway gap, Runaway gap and Exhaustion gap
GAPS appear 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.
1) Area gap will appear inside the trading range. 2) Area gap may be field in near term. 3) The volume during the gap day is generally low.
A breakaway gap occurs when the price gaps above resistance or gaps below support.
Support or resistance, in this case, is often associated with a chart pattern, such as a trading range, triangle, wedge, or other patterns.
Breakaway gaps often occur early in a trend and show conviction in the new trend direction.
A runaway gap will typically occur in the midst of a trend, be it up or down. It is normally defined as a gap of 5% or more that occurs in the direction of a current trend. It is characterized as a runaway gap because of the timing of its occurrence. It is also typically associated with high trading volume supporting the spike in price.
A runaway gap, typically seen on charts, occurs when trading activity skips sequential price points, usually driven by intense investor interest.
Market technicians have theorized that runaway gaps often occur after a security has experienced a breakaway gap.
The psychology behind a runway gap is that traders, who did not get in during the initial move, get tired of waiting for a retracement to join what they perceive to be a trending market and jump in en masse.
This technical signal marks the potential change from upward trend to downward trend.
The signal has three main characteristics including increased volume and a downward price break.
Exhaustion gaps imply that buyers are used up or exhausted and don't have enough orders to overwhelm the significant number of new sellers that seem to have entered into the market.
Several weeks or months of upward trend in the share price of a stock.
A sizable gap between the lowest price of the day previous and the highest price of the most recent trading day (roughly half the range, or better, of an average trading day for that stock).
An above average degree of trading volume taking place on the current day.