From the October 01, 2012 issue of Futures Magazine • Subscribe!

Profiting with price gaps

A runaway gap usually is found around the middle of a trend after price already has made a forceful move in a visible direction. This is a healthy confirmation that price will continue trending, resulting in even more interest in the security among the investing public. Similarly, it’s after these strong moves when many traders who have been on the sidelines waiting for a better entry or exit point decide that if they wait any longer they will miss the trade. 

Once runaway gaps have developed, they are identified as points of support and resistance within the trend. After price breaks away, once it retraces to fill that gap, it’s a sign that the trend is weakening, potentially suggesting a trade exit.

Yet another twist on gap analysis is the exhaustion gap. If a trend has been in place for a prolonged period of time and what appears to be a runaway gap forms on extreme volume, it could signal the end is near. Unfortunately, there is no clear and objective way to distinguish a runaway gap from an exhaustion gap — practice and familiarity with the stock being traded are key (see “Out of steam”). However, a general rule of thumb is the longer a trend persists, the greater chance a gap may signal a last-gasp end to the move.

 

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