Business, Legal & Accounting Glossary
A gap in the price movement of a security that occurs just before a significant new trend. When looking at the chart of the security’s movements, a breakaway gap will be identified as a gap before an obviously bullish or bearish price movement.
A breakaway gap is a technical term that denotes a strong price movement through support or resistance. A gap is the difference between the open price and the previous close price where no trading occurs. In contrast to an intraday breakout, the price breaks away from the support or resistance via a gap. Breakaway gaps are frequently seen early in a trend when the price breaks out of a trading range or after a trend reversal.
A breakaway gap occurs when the price moves above a support or resistance level established during a trading range. A breakaway gap occurs when the price breaks out of a well-established trading range via a gap. A breakaway gap can also form as a result of another chart pattern, such as a triangle, wedge, cup and handle, rounded bottom or top, or head and shoulders pattern.
Breakaway gaps are also frequently associated with the confirmation of a new trend. For example, if the previous trend was down, the price would form a large cup and handle pattern, followed by a breakaway gap to the upside above the handle. This would help to confirm that the downtrend has ended and the uptrend has begun. In addition to the chart pattern breakout, the breakaway gap, which shows strong conviction on the part of the buyers in this case, is evidence that points to further upside.
A breakaway gap with higher-than-average or unusually high volume indicates strong conviction in the gap direction. A rise in volume on a breakout gap indicates that the price is likely to continue in the breakout direction. A breakaway gap has a higher chance of failing if the volume is low. A failed breakout occurs when the price gaps above or below resistance but is unable to sustain the price and returns to the prior trading range.
Gaps can occur at any time, but they are most likely to occur after earnings reports or other major corporate announcements.
While not every trend has a breakaway gap, some do, and they are frequently seen early in a trend when the price makes a significant move outside of a chart pattern. However, a breakaway gap can occur whenever a significant chart pattern is followed by a gapping breakout.
As the trend accelerates, another type of gap known as the runaway gap appears. In an established uptrend, a runaway gap occurs when the price opens significantly higher than the previous close. A runaway gap occurs during a downtrend when the price opens significantly lower than the previous close. Typically, the price continues to move in the direction of the runaway gap within a few weeks, and sometimes within days or even the next day. A runaway gap does not need to breach a major support or resistance level (as a breakaway gap does), but it must occur in the direction of the current trend.
As a trend approaches its end, it may encounter an exhaustion gap. An exhaustion gap occurs near the end of a trend and is caused by a final wave of buyers who regret not buying earlier. An exhaustion gap is a gap caused by sellers in a downtrend. A runaway gap is similar to an exhaustion gap, except that an exhaustion gap is usually associated with extremely high volume. Some runaway gaps are also present, but traders can also look for exhaustion gaps to close quickly. Because an exhaustion gap usually occurs near the end of a trend, any progress made to close the gap is usually erased (gap filled) within a few weeks, if not within a few days.
There are also common gaps, which occur when the open and closing prices differ by a small amount. These happen frequently, and most traders regard them as less important than breakaway, runaway, and exhaustion gaps.
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This glossary post was last updated: 25th January, 2022 | 0 Views.