Gaps in Practice

Today we will re-visit 'Gaps', a practical technical analysis tool that can be a useful in day to day trading.

A gap describes the stock price opening either at a higher or lower price than it reached at any time the previous day. These gaps in prices can be up or down and they can happen with any stock. If, during the trading day the stock continues to trade above the opening price, a gap will exist in the price chart.

Gaps are predominantly news driven, a good example of this is the chart above showing Symbion health (SYB) on 08/02/07. The gap between the 29th to the 30th January was caused by Primary Health (a rival company) securing 5% of SYB stock and after close of trade on the 29th announcing that it had put forward a 'confidential proposal' for a merger or takeover. The news caused the stock to gap the next day above the previous resistance level and peak at $4.30 on speculation of cost savings and increased profits. However, as with most gaps, over time, the euphoria has worn off and the price has come back to fill the gap and re-test the previous resistance as a possible support level.