Price Gap Trading Deep Dive: Common, Breakaway, Continuation, Blow-Off

Price Gaps Overview - Price gaps occur when a stock or ETF trades above or below the previous session's closing price, leaving a distinguishable space on the price chart [1] - Gaps can mark the start of a fresh and powerful trend or have little meaning to a trend [1] Common Gap - Common gaps occur most frequently and tend to rapidly fill [2] - Small magnitude, typically less than 1% for an index and less than 5% for a stock [3] - Below average volume compared to the 50-day average [3] - Occur within a price range or consolidation with no signal in either direction [3] - Example: S&P Regional Banking ETF (KRE) gapped up 1.2% on low volume turnover and filled a few days later [4] Breakaway or Power Gap - Breakaway gaps occur when a stock or index gaps out of a multi-week or multi-month consolidation, marking the start of a fresh trend [5] - Large magnitude, 2% or more in an index, 5% or more in a stock [5] - Massive volume, ideally 50% or more above average [5] - Closes at the top of the range, 75% or higher [5] - Significant bullish catalyst such as earnings, drug approval, or change in monetary policy [6] - Example: Carvana (CVNA) soared 32% on massive volume after announcing its first annual profit [7] - Example: Lockheed Martin (LMT) broke out of a multi-month base on massive volume and closed high in the range [8] Continuation Gap or Runaway Gap - Continuation gaps occur in the middle of a move when a stock is extended from a price consolidation zone [9] - Sizable gap of 5% or more [9] - Example: Nvidia (NVDA) flashed a continuation gap after reporting earnings growth of 478% [10] Climax Top or Blow-Off Top - Climax tops are the most abnormal and extreme gaps, often marking the end of a rally [11] - Largest daily price run-up and heaviest daily volume are cautionary signs [11] - Exhaustion gap occurs when a stock gaps up multiple times, signaling the advance is on its last leg [11] - Example: Qualcomm (QCOM) in 1999 experienced its largest point spread and heaviest daily volume before reversing [13] - Example: Super Micro Computer (SMCI) in 2024 gained ground for nine straight sessions and saw multiple gaps before reversing violently [15] Conclusion - There are four different types of gaps in the stock market: common, breakaway, continuation, and blow-off [16]