The Case for Space
Chances are that you’re pretty unfamiliar with gaps and gap analysis, so it’s important to point out that the gap is defined as a space on the price chart where there are no recorded trades, so it just likes like a day’s trading is missing from the chart. There are many reasons why the gap can occur in an otherwise typical price chart, and it’s important that you consider all possible explanations before you decide to buy or sell the stock.
It’s important for any introduction of gaps and gap analysis to inform you that in most cases the gaps will form after the close of one trading day, and before the next period of trading opens. Sometimes a trading report will not be published until after the stock market has closed for the day, and if traders see that a particular stock made them more than they anticipated, they might place orders for the next day head of time. This will usually result in the opening price for the next day to be much higher than the previous day for no obvious reason. Beginning traders should see the gap as an indication that public thinking about this stock might be changing.
If you’re watching for gaps on your weekly or monthly charts, and are disappointed because you don’t seem to be finding any, it’s important to note that gaps are more frequently spotted on daily charts, because every day presents a new opportunity to form an opening gap. In order to appear on a weekly or monthly chart, it would be necessary for a gap to occur between the close of trading on a Friday and the opening bell on Monday, or between the close of trading on the last day of the month and the first day of the next month. Gaps typically fall into one of four basic categories: Common, Breakaway, Runaway, and Exhaustion.