It is better if the increase in volume does not happen until the gap occurs. Volume will (should) pick up significantly, not only from the increased enthusiasm, but because many are holding positions on the wrong side of the breakout and need to cover or sell them. To break out of these areas requires market enthusiasm, and either many more buyers than sellers for upside breakouts or many more sellers than buyers for downside breakouts. Likewise, the area near the bottom of the congestion area is support when approached from above. The area near the top of the congestion area is usually resistance when approached from below. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. To understand gaps, one has to understand the nature of congestion areas in the market. These occur when the price action is breaking out of a trading range or congestion area. Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement.īreakaway gaps are the exciting ones.
If the price of the stock remains above the previous day's high throughout the day, then an up gap is formed. When the market opens the next morning, the price of the stock rises in response to the increased demand from buyers. 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. Gaps result from extraordinary buying or selling interest developing while the market is closed. Down gaps are usually considered bearish. Up gaps are generally considered bullish.Ī down gap is just the opposite of an up gap the high price after the market closes must be lower than the low price of the previous day. There are two primary kinds of gaps - up gaps and down gaps.įor an up gap to form, the low price after the market closes must be higher than the high price of the previous day. Normally this occurs between the close of the market on one day and the next day's open. Price charts often have blank spaces known as gaps, which represent times when no shares were traded within a particular price range.
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