Breakaway Gaps
Pressure Helps Identify Movers
Gaps occur when there is a dramatic change in market conditions. They can
occur at the beginning of a trading session (i.e. most NASDAQ stocks) or even
during the session itself. There are three types of gaps that are of interest
to us when we analyze charts: breakaway, measured (also known as
continuation) and exhaustion gaps. Today we will discuss the breakaway gap.
Breakaway gaps occur at
the end of moves in the opposite direction of the previous trend, signaling a
reversal. They can also occur after a consolidation. Either way, they tell us
that buying (or selling) pressure is strong and that we can normally expect
price to continue in the direction of the gap.
Our first example, ABS,
shows a nice breakaway gap in mid-February. At the time, how can we know for
sure that this is a breakaway gap? By looking at other chart patterns to help
us - we also have a trendline break as well as a volume climax at the same
time. All three of these patterns indicate a trend reversal.
HON gives us an example
of a breakaway gap out of consolidation in late February. This gap broke
through potential resistance. Other signs of a continued move up are the fact
that the gap bar was preceded by a breakout move from an ascending triangle
formation.
Our final example, CHL,
is meant to illustrate the fact that the significance of a gap is relative to
the security. When you see a gap occur, be sure and look at the chart and
determine whether this gap actually means something or is merely a
continuation of normal behavior. Pay particularly close attention to the
significance of a gap on NASDAQ stocks.
Breakaway gaps are
helpful, but they are NOT tradable without further confirmation. Notice that
in both of the examples above I made sure to look for other chart patterns to
help confirm the significance of the breakaway gap. Learning to identify and
correctly interpret a breakaway gap will also help you identify strong reversal
and breakout candidates.
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Albertson's has a
breakaway gap on a volume climax
Honeywell
International gapped through resistance
China Mobile Ltd
shows the definition of meaningless gaps
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