Gaps Gaps in the technical analysis are named interruptions between close and open prices visualized in bar charts and candlesticks charts. Such a way, an opening outside the previous day's or other period's range generates a price gap. There are four types of gaps: common, breakaway, runaway,and exhaustion. It is commonly believed that "Gaps must be filled." as a result of the pricereversal just after a gap formation. Hence, the time of gap filling may be essentially different for different types of gaps. Common Gaps tend to occur in relatively quiet periods or in illiquid markets. Common gaps areas a rule short term that is it may soon close indeed. When gaps occur within regular trading ranges, the word on the street has been that, "Gaps must be filled". Emerging of a common gap ina rise price chart is a signal buy, in a down price chart – sell. Examples of common gaps areshown on Figures 4.44 and 4.45. As one can see on these figures, the most gaps on charts were closed indeed in filling time up to 12 hours.
Breakaway Gaps occur at the beginning of a new trend, usually after the break of a consolidationpattern. Breakaway gaps indicate most likely direction of the trend continuation and confirm a potential of the market. Examples of breakaway gaps are shown in the Figures 4.46 and 4.47.
Runaway Gaps , or measurement gaps, occur within solid trends, which develop quickly. Theyare known as measurement gaps because they tend to occur about midway through the life of a trend. Thus, if you measure the total range of the previous trend and extrapolate it from the measurement gap, you can identify the end of the trend and your price objective. Since the velocity of the move should be similar on both sides of the gap, you also have a time frame for the duration of the trend. Examples of those gaps are shown on Figures 4.48 – 4.50.
Exhaustion Gaps Exhaustion gaps may occur at the top or bottom of a formation when trendschange direction in an atypically quick manner. Gaps of that kind indicate on the direction of next movement of the market and reflect a sudden change in the demand-supply ratio. By a relatively slow reversal of the market you may wait on two exhaustion gaps to left and to right from a consolidation figure when so called exhaustion island is being formed. Real examples of an Exhaustion Gap and Exhaustion Island are shown on Figures 4.51 and 4.52.
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