Gap analysis helps to identify the strength of the directional movement – whether it is a strong reversal of the trend, start of a new trend, or the end of the current trend.
It helps to local correct phase of the trend – early, breakout or the end.
Gap appears due to difference in trading.
Once the gap is spotted, qualify the gap into: Area, Break out, Runaway or Exhaustion gap to understand the strength & take appropriate action.
Area gap appears in a non-trending zone, low volume and gap may be filled in the near time.
Breakout gap appears in the upward trending zone with good volume.
Runaway gap appears in the upward trending zone with low volume.
In both the above cases, the gaps dont close in the near term.
Exhaustion gap appears in the upward trending zone indicating the close the of trend showing that previous buyers are booking profits & exiting.