Gaps: breakaway, filled and exhaustion

A gap is an empty space on the chart where no trading happened. It means the stock opened far above or below the prior day's range, usually because of news. Gaps can mark the start of a big move or the end of one.

Lesson 26 of 76 · 2 min read

What a gap is

A gap up happens when today's low is above yesterday's high. A gap down happens when today's high is below yesterday's low. Most gaps come from news released outside regular hours, such as an earnings report, guidance, a product launch or an analyst change.

Because the stock jumps past a range of prices, everyone who wanted to trade in between is forced to react at the new price. That is why gaps are often followed by strong moves in the same direction.

Breakaway gaps

A breakaway gap is a gap out of a base or a long sideways range, usually on earnings and with volume two, three or more times normal. It shows a sudden change in how big investors value the company. Some of the biggest winners started with one.

The best breakaway gaps hold most of their gain into the close, closing in the upper part of the day's range. A stock that gaps up 10% and closes near its low is showing selling, not strength.

Gaps that hold vs gaps that fill

A gap is filled when price comes back and trades through the empty space to the prior day's close. You will hear that all gaps get filled. That is not true. Powerful breakaway gaps on strong earnings often never fill, because funds keep buying on any dip.

A useful habit is to watch the low of the gap day. If the stock holds above it in the following days, buyers are still in control. If it closes below the gap day's low, and especially if it fills the gap on heavy volume, the news did not create lasting demand.

Exhaustion gaps

An exhaustion gap appears late in a long advance, after the stock is already far above its base and its moving averages. It looks exciting, but it often marks the last burst of buying. Signs include:

• The stock has already run up for many weeks with several bases behind it.
• The gap comes with huge volume, but the stock stalls or reverses within days.
• The gap fills quickly.
• Smaller gaps in the middle of a trend, called runaway gaps, tend to be less meaningful.

Using gaps on Ticker&Tape

Earnings markers on the chart show you which gaps came from reports. Check the earnings calendar so you are never surprised by a gap against you. To learn how to judge the report itself, read reading an earnings report.

Open the earnings calendar → Try it on Ticker&Tape