Gaps on Stock Charts

A gap in a stock chart -- it can be a beautiful or a hideous thing. Good news or a sudden influx of buying pressure can spike an equity higher, creating a gully in the price action where no trading occurred. In effect, a stock will leap higher out of the gate, opening notably higher than the previous day's close and remaining above this area through the trading day. But in the reverse situation, a stock can plunge south of the previous day's trading range, creating a chasm free of price action. Because of the nature of a bullish or bearish gap, they are almost always formed on a daily basis -- perceptible weekly and monthly gaps are extremely infrequent.

So what are the repercussions of such a dramatic move? It may depend on the action immediately following such a jump. A quick "retracement" of the gap, which effectively "fills" the price action, indicates that the fallout from the gap is likely to be negligible.

But gap levels can also act as yet another layer of technical support or resistance. In other words, after forming a bullish gap, a stock may resist “filling” the gap. The same phenomenon can occur with bear gaps, as the underlying equity becomes unable to hurdle through the gap zone.

A gap can also upset a trading range, taking the shares outside of an established area of price action. The violation of a defined consolidation range can attract more buyers (if the gap breaches this range to the upside) or sellers (if the gap is to the downside), increasing volume. Gaps of this nature, sometimes called "breakaway gaps," tend to be more effectual and may not be "filled" for a longer time than gaps occurring amid more volatile price action.

Gaps are an interesting and occasional dramatic technical development that can be used to gauge entry and exit points in your trading, define new points of support/resistance, or foretell increasing volume and demand.