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A gap is a change in price levels between the close and open of two consecutive days. Gaps are identified as blue circles in the following charts.
Break away gaps often appear at the completion of an important price pattern. When it appears, it signals the beginning of a significant market move. Such moves should ideally appear on heavy volume. Upside gaps usually act as support area on subsequent market corrections.
Run away gaps are a sign of market strength, and usually appear after a trend has been established for a while, and suddenly prices jump up further. This is a situation where the market is moving effortlessly on moderate volume. Run away gaps also act as support on subsequent corrections.
Exhaustion gaps happen when a trend has been around for a long time and it is near the end of a market move, then prices jump forward in a tired attempt to push forward. This quickly fades and prices turn lower within a couple of days.
One reversal pattern which is interesting is the Island Reversal. This is identified when prices gap up, and the next few days trading is in a narrow range, and this is quickly followed by a gap to the downside. This is an indication of a market reversal.
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