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ANALYZING CHART PATTERNS: GAPS (contd)

Breakaway Gap

A breakaway gap occurs at the beginning of a market move - usually after the security has traded in a consolidation pattern, which happens when the price is non-trending within a bounded range. It is referred to as a breakaway gap as the gap moves the security out of a non-trending pattern into a trending pattern.

Breakaway gap

A strong breakaway gap out of a period of consolidation is considered to be much stronger than a non-gap move out. The gap gives an indication of a large increase in sentiment in the direction of the gap, which will likely last for some time, leading to an extended move.

The strength of this gap (and the accuracy of its signal) can be confirmed by looking at that volume during the gap. The greater the volume out of the gap, the more likely the security will continue in the direction of the gap, also reducing the chances of it being filled.

While the breakaway gap generally doesn't fill like the common gap, it will in some cases. The gap will often provide support or resistance for the resulting move. For an upward breakaway gap, the lowest point of the second candlestick provides support. A downward breakaway gap provides resistance for a move back up at the highest price in the second candlestick.

The breakaway gap is a good sign that the new trend has started.

Runaway Gap (Measuring Gap)

A runaway gap is found around the middle of a trend, usually after the price has already made a strong move. It is a healthy sign that the current trend will continue as it indicates continued, and even increasing, interest in the security.

 Runaway (or measuring) gap

After a security has made a strong move, many of the traders that have been on the sideline waiting for a better entry or exit point decide that it may not be coming and if they wait any longer they will miss the trade. It is this increased buying or selling that creates the runaway gap and continuation of the trend.

Volume in a runaway gap is not as important as it is for a breakaway gap but generally should be marked with average volume. If the volume is too extreme, it could signal that the runaway gap is actually an exhaustion gap (discussed further in the next section), which signals the end of a trend.

The runaway gap forms support or resistance in the exact same manner as the breakaway gap. Likewise, the measuring gap does not often fill, and there's cause for concern if the price breaks through the support or resistance, as it is a sign that the trend is weakening - and could even signal that this is an exhaustion gap and not a runaway gap.

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