Custom Search

Continuation gap

 The continuation gap may be hard to distinguish from an exhaustion gap, except that prices do not close the gap quickly. This gap   usually occurs after a breakaway gap, during a straight-line run on high volume.

The gap signals that the price rise isn't over. I measured the position of the continuation gap in the price move and found that it   resides almost halfway (48% of the way) to the trend's end. Hence, that's why some call it a measuring gap, as you can use it to predict when the price trend will end. The continuation gap in Figure 2 shows this midway behavior.

Ex-dividend gap. I don't show this gap type because it is rare. It occurs most often in utility stocks and other securities with large   dividends. On the day the company distributes the dividend, the stock gaps downward. Succeeding price action usually closes the   gap before the end of trading.

Exhaustion gap. The exhaustion gap signals the end of the trend. If you see a very large gap at the end of a trend, it's probably an   exhaustion gap. Volume is usually heavy, and the gap closes quickly. That's what distinguishes it from a continuation gap. Prices   usually reverse direction after an exhaustion gap, providing a short-term trading opportunity. Figure 1 shows this in the exhaustion   gaps, with the September retrace being the most pronounced.

GAP STATISTICS

Figure 4 shows the average closing time for gaps. By that, I mean the time it takes prices to fill the gap or the percentage of gaps   in which prices covered the gap in a set time. Since area gaps occur frequently in consolidation trends, no up- or downtrend   numbers appear. The results show that the average time for area gaps to close is just six days. This compares to 86 days for   breakaway gaps in a downtrend. How many gaps close within a week? Nearly all area gaps (90%) do, but few breakaway gaps   close in that time: 1% in uptrends and 6% in downtrends.

How many gaps close within a year? I expected that most of them would. The exhaustion gaps tie with the area gaps, both at 98%.   Again, breakaway gaps show the fewest closing a year after their appearance, which attests to the strength of the initial push.   Please note that all figures pertain to the recent bull market, not the current bear market. What do all of these numbers mean? If   you buy a stock showing a gap and the gap closes quickly, it's probably an area gap. If a price trend develops, it's probably a   breakaway gap. If the gap doesn't close quickly and a trend is already in progress, then it's most likely a continuation gap. Consider the continuation gap as a marker for the midway point of the trend, and project accordingly for the predicted price move.   If a gap appears at the end of a trend, it's probably an exhaustion gap.

Do you buy the stock, expecting an unusually large gain? How long will it   be before prices return and close the gap?