Reading the Chart
Gaps and retracements
A gap is a price range where nothing traded — the market simply refused to change hands there. It is the only place on a chart where you can see, rather than infer, that one side was so certain it would not wait for the other. Four different gaps look almost identical on the screen, mean four different things, and are separated mostly by WHERE in the move they appear.
Beginners learn "gaps get filled" and trade every gap against its direction. Sometimes that pays and sometimes it stands in front of the strongest move of the year, because the statement is true of one gap type and dangerously false of another. Reading a gap means answering one question before any other: is this gap LEAVING a congestion area, sitting in the MIDDLE of a run, or arriving after the move has already gone a long way?
- COMMON gap — inside a range, on ordinary volume, meaning nothing much. It usually fills within days. This is the gap the folk wisdom is actually about.
- BREAKAWAY gap — leaves a congestion area on heavy volume as a new trend begins. It typically does NOT fill, and it often marks a level that later acts as support or resistance.
- RUNAWAY (measuring) gap — appears mid-trend, when the move accelerates. Its nickname is earned: it tends to fall near the middle of the whole move, so it projects a rough target.
- EXHAUSTION gap — arrives late, after an extended run, often on a final burst of volume, and is followed by a reversal. Distinguishing it from a runaway is genuinely hard in real time; the tell is what price does in the days after it.
A stock breaks out of a base at 40 and runs. At 52 it gaps up to 54 on strong volume and keeps going. If that is a measuring gap, the distance already travelled from the base — 40 to 53, about 13 points — projects roughly the same distance beyond it, giving a target near 66. This is an estimate, not a promise, and its practical value is in position management: you now have a level at which to take partial profits, and a reason to stop adding once price approaches it. A target you set in advance beats a target you invent while holding a winner.
After a move, price retraces part of it before continuing — and the depth carries information. The classical thirds from Dow: a shallow pullback of about a third of the move is strength, half is normal, and beyond two thirds the move is in question because most of the advance has been given back. The Fibonacci practitioners use 38.2%, 50% and 61.8%, which in practice sit close enough to the thirds that the two schools rarely disagree about a decision. What matters is not which number is metaphysically correct — it is that a retracement of 40% and a retracement of 80% are different events, and only one of them still looks like a pullback.
Breakaway and runaway gaps frequently do not fill for months, and standing in front of one is how a trader ends up short a stock that has doubled. The tell is volume and location: a gap out of a long base on triple average volume is a new regime announcing itself, not an error to be corrected. If you must fade a gap, fade a small one inside an established range, with a defined stop above it — and accept that you are trading the least informative of the four types.
Gaps require the market to close. A 24-hour market like major FX or crypto gaps mainly over the weekend or on a genuine shock, so gap analysis carries far less weight there than on stocks. And on any instrument, a gap on the OPEN of a low-liquidity session is often just a thin book, not a decision by anybody — check that the volume behind it is real before you read meaning into it.
A gap is not an anomaly to be corrected; it is a measurement of urgency. The question is never "will it fill?" but "who was in such a hurry, and had the move already run?" Answer the second question and the first stops mattering — early urgency starts trends, mid-trend urgency measures them, and late urgency is usually the last buyer arriving.
Price has rallied for eleven weeks. It then gaps up 6% on the heaviest volume of the entire move, and over the following four sessions it closes back inside the gap. Which gap type was it, and what does the re-entry tell you? (Exhaustion. A late gap on climactic volume that is then filled says the final buyers were absorbed and the move has run out of recruits — closing back inside is the confirmation that turns an ambiguous gap into a warning.)
Four gaps, told apart by position rather than by looks: common inside a range and unremarkable, breakaway leaving a base on heavy volume and rarely filled, runaway mid-move and roughly measuring the rest of it, exhaustion arriving late before a turn. And on retracements: about a third is strength, half is normal, past two thirds the move is in doubt — whether you label those levels with thirds or with Fibonacci changes almost nothing about the decision.
Scan one year of a daily chart and mark every gap you can find. For each, write two words: its position (range / breakout / mid-trend / late) and its outcome (filled within a week / not filled). You will end up with a small hand-built table showing that the fill rate depends almost entirely on the first word. That table, built by you on your instrument, will be more persuasive than any rule someone hands you.
Reading the Chart