Gaps occur because of underlying fundamental or technical factors. For example, if a company’s earnings are much higher than expected, the company’s stock may gap. This means that the stock price opened more than it closed the day before, thereby leaving a gap. Inside the fx market, it is common for only a report to generate a lot buzz that it widens the bid and ask spread to a point where a significant gap is located. Similarly, a stock breaking a new loaded with this session may open higher in the next session, thus gapping up for technical reasons.
Gaps can be classified into four groups:
- Breakaway gaps are those people who occur right at the end of your price pattern and signal the grass roots of a whole new trend.
- Exhaustion gaps occur close to the end of a price pattern and signal a final attempt to hit new highs or lows.
- Common gaps are those which can not be placed in a price pattern – they simply represent a location where the price has gapped Continuation gaps happen in the center of any price pattern and signal a rush of buyers or sellers who share typical belief throughout underlying stock’s future direction.To Fill or otherwise to Fill When someone says that the gap has long been filled. Meaning that price has moved to the inital pre-gap level. These fills are very normal and occur because of:
- Irrational Exuberance: The initial spike can have been overly optimistic or pessimistic, therefore inviting a correction.Technical Resistance: Whenever a price moves up or down sharply, it doesn’t leave behind any support or resistancePrice Pattern: Price patterns are being used to sort out gaps, and may tell you if a gap will probably be filled or not
- Exhaustion gaps are typically most likely to be filled because they signal the ultimate of any price trend,while continuation and breakaway gaps are significantly less about to be filled,simply because they are employed to check on the direction of the current trend.When gaps are filled inside the same trading day on which they have happend, this is referred to as “fading.” For example, let’s say a firm announces great earnings per share for this quarter, and also the stock gaps up at open (meaning it opened significantly more than its previous close).Now let’s state that, as the day progresses, people realize that the cash flow statement shows some weaknesses, to make sure they start selling. Eventually, the cost price hits yesterday’s close, as well as the gap is filled. Many daytraders use this strategy during earnings season or at in some cases when irrational exuberance is at a top.