What Is a Breakaway Gap?
A breakaway gap is a term used in technical analysis which identifies a strong price movement through support or resistance. A gap is the difference between the open price and prior close price, where no trading activity takes place. The price breaks away from the support or resistance via a gap, as opposed to an intraday breakout. Breakaway gaps are often seen early in a trend when the price moves out of a trading range or following a trend reversal.
- A breakaway gap occurs when the price gaps above resistance or gaps below support.
- Support or resistance, in this case, is often associated with a chart pattern, such as a trading range, triangle, wedge, or other patterns.
- Breakaway gaps often occur early in a trend and show conviction in the new trend direction.
- Other gap types include runaway, exhaustion, and common gaps.
Understanding the Breakaway Gap
A breakaway gap occurs when the price gaps above a support or resistance area, like those established during a trading range. When the price breaks out of a well-established trading range via a gap, that is a breakaway gap. A breakaway gap could also occur out of another type of chart pattern, such as a triangle, wedge, cup and handle, rounded bottom or top, or head and shoulders pattern.
Breakaway gaps are also typically associated with confirming a new trend. For example, the prior trend may have been down, the price then forms a large cup and handle pattern, and then has a breakaway gap to the upside above the handle. This would help confirm that the downtrend is over and the uptrend is underway. The breakaway gap, which shows strong conviction on the part of the buyers, in this case, is a piece of evidence that points to further upside in addition to the chart pattern breakout.
A breakaway gap with larger than average volume, or especially high volume, shows strong conviction in the gap direction. A volume increase on a breakout gap helps confirm that the price is likely to continue in the breakout direction. If the volume is low on a breakaway gap there is a greater chance of failure. A failed breakout occurs when the price gaps above resistance or below support but can't sustain the price and moves back into the prior trading range.
Gaps can occur at any time but are highly likely to occur following earnings announcements or other major corporate announcements.
Trend and Gap Cycles
While not every trend has a breakaway gap, some trends do have a breakaway gap and they are often seen early on in a trend when the price makes a significant move outside of a chart pattern. That said, anytime a significant chart pattern is followed by a gapping breakout, it could be called a breakaway gap.
As the trend accelerates it then tends to see another type of gap called the runaway gap. A runaway gap is when the price opens significantly higher than the prior close in an established uptrend. During a downtrend, a runaway gap is when the price opens significantly lower than the prior close. Typically the price continues moving in the runaway gap direction within a few weeks, and sometimes within days or even the next day. A runaway gap doesn't need to breach a major support or resistance level (like a breakaway gap) but it must occur in the current trend direction.
As a trend nears its end, it may experience an exhaustion gap. An exhaustion gap occurs near the end of a trend and is caused by a final group of buyers, who regret not having bought prior, surging in. In a downtrend, an exhaustion gap is a gap caused by sellers. An exhaustion gap is similar to a runaway gap, except that an exhaustion gap is usually associated with very high volume. Some runaway gaps are as well, yet traders can also watch for exhaustion gaps to fill quickly. Since an exhaustion gap usually occurs near the end of the trend, any progress the gap made is usually erased (gap filled) within a few weeks and often within several days.
There are also common gaps which occur when there is a small difference between the open and closing price. These occur frequently and most traders consider them to have less significance than breakaway, runaway, and exhaustion gaps.
Example of a Breakaway Gap in the Stock Market
The chart of Apple Inc. (AAPL) below has three gaps marked on it. The first comes when the price forms a triangle pattern after a downtrend. The price then gaps above the triangle, on high volume, and then continues to rally to the upside. This is a breakaway gap associated with an earnings announcement.
During the ensuing uptrend, the price also experienced some runaway gaps. The first runaway gaps—there was a series of them—were not associated with earnings. The second runaway gap marked on the chart was associated with earnings. These gaps all occurred on high volume.