Gaps

Core idea

A gap appears on a daily chart when today's low is higher than yesterday's high (upward gap) or today's high is below yesterday's low (downward gap). There are six gap types in technical analysis; this topic covers the four that matter for end-of-day traders:

1. Area (common / pattern) gap — appears inside a congestion region; closes within days. Background noise.
2. Breakaway gap — appears at the start of a new trend on heavy volume; rarely closes within a week.
3. Continuation (runaway / measuring) gap — appears in the middle of a strong trend; closes in months, not days. Marks the midpoint.
4. Exhaustion gap — appears near the end of a trend on heavy volume; closes quickly and often heralds a violent reversal.

The ex-dividend gap and the intraday opening gap are the other two; both are excluded as not actionable for end-of-day pattern traders.

The diagnostic question

Confronted with a gap, the diagnostic question is "where in the trend did this gap appear?" Position in the trend (start / middle / end) plus volume (high / normal) determines the type. The gap's appearance alone is ambiguous; the context resolves it.

Why it matters

Misclassifying a gap is one of the costliest single mistakes a trend trader makes. Buying a stock on what looks like a breakaway gap that turns out to be an exhaustion gap delivers immediate reversal losses with no recovery. The reverse — selling on a "breakaway" that's actually a continuation gap — exits a runner with half the move remaining. The classification matters because each type has a different expected duration before closure, a different volume signature, and a different implication for where price goes next.

The topic is also the cleanest example of how volume disambiguates ambiguous price action. Gap size alone is not enough; an excessively tall gap near the end of a trend on a volume spike is far more likely exhaustion than continuation.

Key takeaways

Mental model

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Practical application

Classifying a gap

Trading the four types

Example

A semiconductor stock has rallied from $40 to $85 over four months — vertical, low pullbacks. In month 5, the company announces blowout earnings. The next morning, price gaps from $86 to $97, closes at $99 on 8x average volume.

Classification check:

• Location: end of a long sustained rally → bias toward exhaustion.
• Volume: 8x normal, sustained at close → consistent with exhaustion or breakaway. But this is mid-trend, not start.
• Size: 13% gap → "excessively tall."

The diagnosis: most likely exhaustion. Decision: sell any long positions at the next open ($98 area).

Three days later, the stock prints $94 on declining volume — a small dead-cat bounce. Then breaks below $90 on day 4. Within two weeks, price is back to $76 — below the gap's lower edge.

Counter-example: the same stock six months earlier, after a flat $40 base. Earnings beat → gap from $41 to $47 on 6x volume.

• Location: just exiting horizontal congestion → breakaway bias.
• Volume: high, sustained → consistent.
• Size: 14% gap → larger than normal but reasonable for an earnings move.

Diagnosis: breakaway. Decision: buy at the next open ($47.20), stop at $40.80 (below the pre-gap base). Hold the position. Two months later, price hits $68; the gap from $41-$47 never closes. That's the breakaway pattern in textbook form.

Same gap shape, opposite trade — because location and trend context flipped the classification.

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