What Is a Common Gap?
A common gap is a price gap found on a price chart for an asset. These occasional gaps are brought about by normal market forces and, as the name implies, are very common. They are represented graphically by a non-linear jump or drop from one point on the chart to another point.
- A gap occurs when the opening price is above or below the previous closing price, with no trading activity in between.
- There are common gaps, breakaway gaps, runaway gaps, and exhaustion gaps.
- Common gaps tend to be partial gaps and occur on a more frequent basis due to normal trading activity.
Understanding Common Gaps
In general, there is no major event that precedes this type of gap. Common gaps generally get filled relatively quickly (usually within a couple of days) when compared to other types of gaps. Common gaps are also known as "area gaps" or "trading gaps" and tend to be accompanied by normal average trading volume.
Because common gaps are relatively small, normal and somewhat regular events in the price action of an asset, they tend to provide no real analytical insight. These gaps are observed frequently in assets that experience a break from one day's market close to the next day's open and may be exaggerated by events that occur between Friday and Monday trading over a weekend.
Common gaps are typically what market technicians refer to as filled gaps. This refers to when the price from a gap reverts back to where the gap initially began, where the empty space has thus been considered to be filled. For instance, if shares of XYZ stock closed at $35.00 on Monday, and then XYZ opens the next day at $35.10, the Tuesday intra-day price will tend to include the $35 price level.
Common Gaps vs. Other Types of Gaps
By contrast, a breakaway gap shows decisive movement out of a range or other chart pattern. A breakaway gap can be seen when the price moves sharply through a support or resistance level established by a trading range. A breakaway gap may also accompany a technical chart pattern, such as a wedge, rounded bottom, or head and shoulders.
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.