The breakaway gap is an important type of stock gap to understand when it comes to support and resistance levels. Breakaway gaps can cause huge shifts in the price of a stock in either direction and are important to recognize so you can make more informed trading decisions.
- A breakaway gap will break above or below key support or resistance level on a chart
- They are event-driven and will result in a significant change in the appearance of a chart
- The properties of breakaway gaps include higher than average trading volume, aggressive price movement, increase in the width of the regular trading range, and an overall increase in the volatility of the security
What is the Breakaway Gap?
A breakaway gap is a price gap in which the price moves past a support or resistance level on a chart. This “gap” is the difference between the open price and the close price of a financial instrument in which no trading occurs.
When breakaway gaps occur they tend to break out of a current price range and confirm the start of a new trend. They are extremely useful for technicians as they can provide valuable insight into stocks that have serious growth potential.
Understanding Breakaway Gaps in Trading
Breakaway gaps are usually event-driven, things such as an earnings report, a new product or service, or a merger. When a breakaway gap occurs, there will usually be a significant change in the overall appearance of the chart. They may be hard to spot and completely make sense of in some scenarios, but the following rules should help you identify them.
The breakaway gap should:
- The gap should be significant compared to the regular trading range: If the stock usually trades in a $5 range between the daily high and low, and the gap happens to be $10 between the previous day’s high and the gap-day open, you will notice that the gap is significant.
- Should occur in an existing trend or slight price consolidation: Breakaway gaps are most noticeable when there isn’t much going on with the current price or the price is in a slight trend. News or institutional buying can trigger a breakaway gap and will be quite noticeable as the trading range of a stock consolidates further.
Why Do Breakaway Gaps Occur?
When buying demand exceeds the number of shares available for purchase by a large degree, the price of an instrument can gap up significantly and break through its regular trading range. Breakaway gaps commonly occur when a stock is already moving in a specific trend and certain news or institutional buying can push it to new levels and continue the current trend.
Properties of Breakaway Gaps
Breakaway gaps are usually pretty easy to spot since they can cause an immediate change in the appearance of charts. Some of the most common properties of breakaway gaps include.
- Higher than average trading volume
- Aggressive price movement to the upside or downside
- An increase in the width of the regular trading range
- Increase in the volatility of the stock
It’s important to note that breakaway gaps can happen on the upside as well as the downside. As such it’s important to understand each side.
Breakaway gap to the upside: A breakaway gap to the upside is a result of positive news about the security. You will notice a higher trading volume accompanied by a spike in the price.
Breakaway gap to the downside: A breakaway gap to the downside typically indicates a trend reversal or negative news about the company, such as lower than expected earnings or a potential lawsuit.
Important Note: It’s worth noting that breakaway gaps don’t get filled as regularly as common gaps do.
Making Sense of Breakaway Gaps
Although not every trend will have a breakaway gap, there are a decent amount of securities that will experience it. In addition, securities can experience another type of gap that can occur as a result of a breakaway gap, known as a “runaway gap”.
It’s important to understand the distinction between breakaway gaps and runaway gaps as they have different price behaviors but can sometimes appear to be the same.
A runaway gap is when the price of a security opens up either higher or lower than the previous close. They can appear the same as breakaway gaps but they don’t need break through a key support or resistance level. When runaway gaps occur, they will occur in the direction of the current trend for a few days or even weeks before retracing. They will also have strong volume with an aggressive price move.
So to re-iterate, breakaway gaps will break above or below support or resistance while runaway gaps usually occur in a strongly developed trend.