GAP THEORY

BY BHAVYA NAIR
BMS,MBA (FINANCE)
9 YRS OF EXPERIENCE
 INTRODUCTION

• IT IS AN AREA ON A CHART WHERE PRICE OF STOCK MOVES SHARPLY UP OR DOWN,

WITH LITTLE OR NO TRADING IN BETWEEN
• OCCURS UNEXPECTEDLY DUE TO FUNDAMENTAL OR TECHNICAL FACTORS
• WHEN A STOCK ENDS THE DAY AT CERTAIN LEVEL AND THEN STARTS AT A NEW
LEVEL EVEN THOUGH NO TRADE TAKES PLACE WE CALL IT AS GAP
• THEY ARE USUALLY ONE DAY TO NEXT
• THE REASON CAN BE NEWS RELATED TO COMPANY OR INDUSTRY ETC..
•
 TYPES OF GAPS
1.COMMON GAPS/AREA/TEMPORARY/PATTERN

- IT OCCUR IN CALM AND QUIET MARKET

- IT HAS A TENDENCY TO OCCUR IN A PRIME CONGESTION PATTERN
- THIS GAPS GETS FILLED WITHIN FEW DAYS OR WEEKS
- IT IS SEEN WHEN STOCK GOES EX-DIVIDEND
- IT TEND TO OCCUR WHEN TRADING IS BOUND BETWEEN SUPPORT AND
RESISTANCE LEVEL ON A SHORT SPAN OF TIME
- THERE IS NOT MUCH TRADING OPPORTUNITY
 2.BREAKAWAY GAP

• THE PRICE CHART THAT OCCUR AFTER PRICE BREAKS OUT OF A CONGESTION ZONE
OR TRADING RANGE
• THIS GAPS DON’T GET FILLED UP QUICKLY
• IT IS SEEN AT THE END OF PRICE PATTERN
• IT SIGNALS THE BEGINNING OF NEW TREND
• IT IS ASSOCIATED WITH INCREASE IN VOLUME
• HERE GAP TRIGGERS A RESISTANCE OR SUPPORT BREAK
• IT IS SIGNIFIED BY A REVERSAL TREND GAP IN MOVEMENT OF STOCK PRICE
 3.RUNAWAY GAP

• IT IS CALLED AS MEASURING/ CONTINUATION GAP

• IT OCCURS HALFWAY THROUGH A STRONG TREND
• IT IS FOUND IN THE MIDDLE OF RAPID ADVANCE OR DECLINE OF PRICE
MOVEMENT
• IT BELIEVES THAT STOCK MOVES AN EQUAL DISTANCE IN PRICE BEFORE
MEASURING GAP AND HELPS TO MEASURE THE PROBABLE TARGET AREA OF
THE PRICE MOVE
 4.EXHAUSTION GAP

• IT OCCURS AT THE END OF THE PRICE PATTERN

• IT INDICATES END OF THE PROLONGED UPTREND OR DOWN TREND
• IT IS TRADED IN HUGE VOLUME
• IT SIGNALS A FINAL ATTEMPT TO HIT A NEW HIGH OR NEW LOW
• IT HAPPENS WHEN STOCK SHOOTS UP AND CONTINUES TO TRENDING BUT WILL
EVENTUALLY DECLINE
• OR IT HAPPENS WHEN STOCK JUMPS DOWN AND CONTINUES TO DECLINE AND
EVENTUALLY RISE
RECAP
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