The Importance of Gaps: It's Where They Fall within a Trend That Counts
by Richard Evans
Gaps are one of the most interesting, and instructive, developments in all of technical analysis. A few hours of study devoted to gaps can pay handsome rewards to investors.
Gaps are simply price ranges where no transactions take place, therefore the term “gap.” Gaps are the result of a temporary supply/demand imbalance, with prices either jumping sharply or dropping sharply, until a balance is restored. As technical analysis is the study of the demand/supply variables underlying price, gaps can be very instructive.
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The particular importance as to forecasting implications, however, depends on where the gap occurs. Sometimes gaps have a great deal of significance; sometimes gaps have very little significance. Any importance of a gap depends on where within the trend the gap develops.
Breakaway Gaps
Most gaps appear within a pattern, within an area of trading, and have very little significance. Within most any type of pattern, prices will be backing and filling, seesawing, with frequent “area” gaps in evidence. The implications of these pattern gaps are nil.
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