Gaps and Gap Analysis

Exhaustion Gap

By March 17, 2016 December 1st, 2018 No Comments

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High Volume and High Profit

The basic mantra of all successful traders is buy low and sell high, and if you can make an educated prediction about whether the market is going to shift up or down, you’ll be in a much better position to put that mantra into action. The exhaustion gap is one of the clues that the market gives you to indicate that the current trend might be coming to a close.

Gaps are spaces in the stock price chart where it seems like no trades have occurred, and they can be perplexing to the new trader. Usually an exhaustion gap or any other gap usually indicates that the psychology of the market surrounding a particular stock is changing, although there may be no statistical evidence that it is more or less valuable than it was the day before.

For instance, a gap can result when a stock has been showing a particularly strong up or down trend and people start to get overly enthusiastic about it. If they decide to place advance orders for the stock after the close of the trading day, it can drive up the price of the stock without showing this activity on the daily trading charts. The exhaustion gap usually appears at the end of a strong trend, and indicates that the market might be about to stop supporting the trend. The day after a big gap like this is usually the time to buy before the trend plunges downward.

It’s important to note that most technical analysts consider the exhaustion gap to be a temporary gap. Although a decrease in demand causes the range in price to gap in the first place, most analysts expect the gap to quickly be filled once both demand and upward pressure on price are reestablished.