We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Price Gap Trading Deep Dive: Common, Breakaway, Continuation, Blow-Off
Read MoreHide Full Article
Price gaps are one of the most misunderstood areas in technical analysis. Price gaps occur when the price of a stock or ETF trades above or below the previous session’s closing price, leaving a distinguishable space on the price chart. Gaps can occur for a plethora of different reasons, or they can happen for no reason at all. They can have little or no meaning to a trend, or mark the start of a fresh and powerful trend.
Understanding the Different Types of Price Gaps
1. Common Gap:
These gaps occur most frequently and tend to rapidly fill (close the after hours move). Common gaps are not actionable for the intermediate speculator and are mostly used by short-term traders to identify support and resistance zones.
Traits:
Small magnitude (typically gap less than 1% for an index and less than 5% for a stock).
Below average volume (versus the 50-day average).
Occur within a price range or consolidation.
There is no signal in either direction.
Example:
Below is an example of a common gap that occurred in the S&P Regional Banking ETF ((KRE - Free Report) ). Price gaps up a miniscule 1.2% on low volume turnover. Notice how the gap finishes low in the range and fills a handful of days later.
Image Source: TradingView
2. Breakaway or Power Gap:
If you are going to put in the effort to learn one type of gap, I would recommend learning this one. A breakaway gap occurs when a stock or index gaps out of a multi-week or multi-month consolidation. Power gaps or breakaway gaps mark the start of a fresh trend.
Traits:
Large magnitude (2% or more in an index, 5% or more in a stock).
Massive volume (ideally, volume is 50% or more above average; the more, the better)
Closes at the top of the range (75% or higher; the closer to the high of the range, the better).
A significant bullish catalyst (earnings, drug approval, change in monetary policy).
Example:
In 2022, Carvana ((CVNA - Free Report) ) was a penny stock, losing money hand over first and on the brink of bankruptcy. However, in 2024, the company turned the ship around fast. On February 23rd the stock soared 32% as turnover more than tripled after the company announced its first annual profit. In May, the stock again gapped up more than 30% on massive volume after the e-commerce company reported better-than-expected earnings and raised EPS guidance. Notice how, in each instance, the stock emerged from a consolidation. CVNA is an excellent example of how a stock that may seem too high will often move higher.
Image Source: TradingView
Example 2:
Defense contractor Lockheed Martin ((LMT - Free Report) ) is another recent breakaway gap worth studying. Note how the stock breaks out of a multi-month base on massive volume and closes high in the range. As you can see from the chart, it is not necessary to be in the stock prior to the gap, as often the stock will drift higher after a breakaway gap.
Image Source: TradingView
3. Continuation Gap or Runaway Gap
As the name implies, continuation gaps occur in the middle of a move when a stock is extended from a price consolidation zone. Usually, the stock has run for several weeks and then gaps up again, making it even more extended. Continuation gaps are not actionable, but investors lucky enough to hold a position in the stock can use them to raise their risk or stop losses.
Traits:
A sizable gap of 5% or more.
The stock is extended from a base structure before the gap.
Example:
Market leader Nvidia ((NVDA - Free Report) ) flashed a continuation gap in February after reporting solid earnings that grew 478%. Before the gap, the stock had run for six straight weeks after breaking out of a price consolidation. The NVDA example is worth studying because though the stock continued to move higher for a few more days, it needed to take a multi-month break after the runaway gap. Knowing your time frame and risk appetite is critical in determining how patient you want to be with a continuation gap.
Image Source: TradingView
4. Climax Top or Blow-Off Top
Once an investor trains their eye, climax tops are the easiest to spot because they are the most abnormal and extreme gaps. The late William O’Neil, a growth investor, defines this type of gap the best:
“Many leading stocks top in an explosive fashion. They make climax runs – suddenly advancing at a much faster rate for one or two weeks after an advance of many months. In addition, they often end in exhaustion gaps – when a stock’s price opens up on a gap from the prior day’s close, on heavy volume.”
Key Rules of the Climax Top
Largest daily price run-up: A cautionary sign occurs when a stock that has rallied for months experiences its largest point increase in the move.
Heaviest daily volume: Extreme volume signals that trapped shorts have capitulated while amateur longs chased the extended stock.
Exhaustion gap: If a stock gaps up (trades higher in after-hours trading) multiple times, the advance is on its last leg.
Climax top activity: “Sell if a stock’s advance gets so active that it has a rapid price run-up for two or three weeks on a weekly chart, or for seven of eight days in a row or eight of ten days on a daily chart.”
1999 QCOM Case Study
In 1999, no hotter stock existed than semiconductor maker Qualcomm ((QCOM - Free Report) ).As the internet craze went into a frenzy, QCOM ran from ~$6 to $200 in a year! Sure enough, the move came to an end in a classic climax top:
1. Largest point spread: On December 29, 1999, QCOM gained $39 points in a single session, marking its largest point spread to that point.
2. Heaviest daily volume: Though QCOM didn’t trade its highest volume ever, volume on 12/29 soared 142% versus the 50-day average and was the heaviest volume in weeks.
3. Exhaustion gap: After running for months, QCOM gapped up in price from an extended move. ***(It’s essential to decipher a gap up from a base (healthy) from a gap up from an extended move (exhaustion))***
4. Climax top activity: From 12/13/1999 to 12/21/999, QCOM shares gained ground for seven straight sessions – a red flag.
Below is the marked-up 1999 QCOM example. A good exercise is to look at each data point and match it to the chart and the commentary.
Like QCOM in 1999, Super Micro Computer ((SMCI - Free Report) ) was an undisputed leader in a burgeoning industry. Entering 2024, the stock gained more than 5,000%. In early 2024, the company surprised investors by bumping earnings guidance. Since earnings growth was already strong, investors began to pile into the stock, sending it soaring from $338 to over $1,000 in one month!
However, in February 2024, the stock began to show signs of overheating. SMCI shares gained ground for nine straight sessions and saw multiple gaps. Another clear signal was that the stock ran over$100 points after being up eight days in a row (remember, the stock was under $300 a month before!). Finally, the stock reversed violently as volume turnover was the highest on record (distribution).
Image Source: TradingView
Bottom Line
There are four different types of gaps in the stock market: common, breakaway, continuation, and blow-off. Savvy investors succeed by studying and understanding the subtle differences between them.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Price Gap Trading Deep Dive: Common, Breakaway, Continuation, Blow-Off
Price gaps are one of the most misunderstood areas in technical analysis. Price gaps occur when the price of a stock or ETF trades above or below the previous session’s closing price, leaving a distinguishable space on the price chart. Gaps can occur for a plethora of different reasons, or they can happen for no reason at all. They can have little or no meaning to a trend, or mark the start of a fresh and powerful trend.
Understanding the Different Types of Price Gaps
1. Common Gap:
These gaps occur most frequently and tend to rapidly fill (close the after hours move). Common gaps are not actionable for the intermediate speculator and are mostly used by short-term traders to identify support and resistance zones.
Traits:
Example:
Below is an example of a common gap that occurred in the S&P Regional Banking ETF ((KRE - Free Report) ). Price gaps up a miniscule 1.2% on low volume turnover. Notice how the gap finishes low in the range and fills a handful of days later.
Image Source: TradingView
2. Breakaway or Power Gap:
If you are going to put in the effort to learn one type of gap, I would recommend learning this one. A breakaway gap occurs when a stock or index gaps out of a multi-week or multi-month consolidation. Power gaps or breakaway gaps mark the start of a fresh trend.
Traits:
Example:
In 2022, Carvana ((CVNA - Free Report) ) was a penny stock, losing money hand over first and on the brink of bankruptcy. However, in 2024, the company turned the ship around fast. On February 23rd the stock soared 32% as turnover more than tripled after the company announced its first annual profit. In May, the stock again gapped up more than 30% on massive volume after the e-commerce company reported better-than-expected earnings and raised EPS guidance. Notice how, in each instance, the stock emerged from a consolidation. CVNA is an excellent example of how a stock that may seem too high will often move higher.
Image Source: TradingView
Example 2:
Defense contractor Lockheed Martin ((LMT - Free Report) ) is another recent breakaway gap worth studying. Note how the stock breaks out of a multi-month base on massive volume and closes high in the range. As you can see from the chart, it is not necessary to be in the stock prior to the gap, as often the stock will drift higher after a breakaway gap.
Image Source: TradingView
3. Continuation Gap or Runaway Gap
As the name implies, continuation gaps occur in the middle of a move when a stock is extended from a price consolidation zone. Usually, the stock has run for several weeks and then gaps up again, making it even more extended. Continuation gaps are not actionable, but investors lucky enough to hold a position in the stock can use them to raise their risk or stop losses.
Traits:
Example:
Market leader Nvidia ((NVDA - Free Report) ) flashed a continuation gap in February after reporting solid earnings that grew 478%. Before the gap, the stock had run for six straight weeks after breaking out of a price consolidation. The NVDA example is worth studying because though the stock continued to move higher for a few more days, it needed to take a multi-month break after the runaway gap. Knowing your time frame and risk appetite is critical in determining how patient you want to be with a continuation gap.
Image Source: TradingView
4. Climax Top or Blow-Off Top
Once an investor trains their eye, climax tops are the easiest to spot because they are the most abnormal and extreme gaps. The late William O’Neil, a growth investor, defines this type of gap the best:
“Many leading stocks top in an explosive fashion. They make climax runs – suddenly advancing at a much faster rate for one or two weeks after an advance of many months. In addition, they often end in exhaustion gaps – when a stock’s price opens up on a gap from the prior day’s close, on heavy volume.”
Key Rules of the Climax Top
1999 QCOM Case Study
In 1999, no hotter stock existed than semiconductor maker Qualcomm ((QCOM - Free Report) ).As the internet craze went into a frenzy, QCOM ran from ~$6 to $200 in a year! Sure enough, the move came to an end in a classic climax top:
1. Largest point spread: On December 29, 1999, QCOM gained $39 points in a single session, marking its largest point spread to that point.
2. Heaviest daily volume: Though QCOM didn’t trade its highest volume ever, volume on 12/29 soared 142% versus the 50-day average and was the heaviest volume in weeks.
3. Exhaustion gap: After running for months, QCOM gapped up in price from an extended move. ***(It’s essential to decipher a gap up from a base (healthy) from a gap up from an extended move (exhaustion))***
4. Climax top activity: From 12/13/1999 to 12/21/999, QCOM shares gained ground for seven straight sessions – a red flag.
Below is the marked-up 1999 QCOM example. A good exercise is to look at each data point and match it to the chart and the commentary.
Image Source: TradingView
Super Micro Computer (SMCI - Free Report) 2024 Example
Like QCOM in 1999, Super Micro Computer ((SMCI - Free Report) ) was an undisputed leader in a burgeoning industry. Entering 2024, the stock gained more than 5,000%. In early 2024, the company surprised investors by bumping earnings guidance. Since earnings growth was already strong, investors began to pile into the stock, sending it soaring from $338 to over $1,000 in one month!
However, in February 2024, the stock began to show signs of overheating. SMCI shares gained ground for nine straight sessions and saw multiple gaps. Another clear signal was that the stock ran over$100 points after being up eight days in a row (remember, the stock was under $300 a month before!). Finally, the stock reversed violently as volume turnover was the highest on record (distribution).
Image Source: TradingView
Bottom Line
There are four different types of gaps in the stock market: common, breakaway, continuation, and blow-off. Savvy investors succeed by studying and understanding the subtle differences between them.