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Chapter 1. What Are Gaps?

Chapter 1. What Are Gaps?

Gaps have attracted the attention of market technicians since the earliest days of stock charting. A gap occurs when a security’s price jumps between two trading periods, skipping over certain prices. A gap creates a hole, or a void, on a price chart.

Because technical analysis has traditionally been an extremely visual practice, it is easy to understand why early technicians noticed gaps. Gaps are visually conspicuous on a price chart. Consider, for example, the stock chart for Huntington Bancshares (HBAN) in Figure 1.1. A quick glance at the price activity reveals four gaps.

Image

Created with TradeStation

Figure 1.1. Gaps on stock chart for HBAN September 29–December 2, 2011

In Figure 1.1, Gap A and Gap C are known as a gap down. A gap down occurs when one day’s high is lower than the previous day’s low. In the figure you can see that the lowest price for HBAN on September 19 was $5.20. On September 20, the highest price at which HBAN traded was $5.01. Thus, a gap of 19 cents was formed. From September 19 through September 20, HBAN traded for $5.20 and higher and for $5.01 and lower; however, no shares traded hands at a price between $5.01 and $5.20. Thus, a void or gap in price was formed.


  

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