Interpreting Common, Breakaway, Runaway, and Exhaustion Price Gaps

Summary

This guide defines a price gap as a discontinuity between consecutive bars and describes how chartists interpret gaps in relation to trends. Common gaps are small and frequent, and often fill, so the document treats them as offering little directional information. Breakaway gaps mark a move out of a range or chart pattern, often alongside heavy volume or a catalyst, while runaway gaps occur within an established trend and are presented as signs of continuation.

Exhaustion gaps appear late in a trend and may precede a reversal; volume can be either subdued or unusually high. An island reversal combines a gap with a sideways cluster of bars and a gap in the opposite direction, potentially trapping traders and reinforcing a turn. These are interpretive chart patterns, not tested trading rules. The document notes that an exhaustion gap can be difficult to distinguish from a breakaway gap in real time, and that a reversal signal does not identify the precise turning point.

Key ideas

• Common gaps occur frequently and are generally treated as weak directional evidence.
• Breakaway gaps can mark a transition from a range into a trend, while runaway gaps may indicate trend continuation.
• Exhaustion gaps can signal that a trend is weakening, but may not pinpoint its reversal.
• An island reversal forms when a sideways cluster is isolated by gaps in opposite directions.
• Gap interpretations can be uncertain in real time, especially when distinguishing exhaustion from a new breakout.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.