Breakaway Gaps & Island Reversal






How often have you seen the price of any stock opening upwards or downwards with a gap?
If you have seen it and have not yet been able to draw appropriate conclusions from it then this post is for you.

 Let's start with understanding Price Gaps. Price Gaps are areas on the chart where no trading has taken place. In uptrend, a gap is formed on the charts when the day's low is higher than the previous day's high. Suppose the high of the previous day was Rs. 19 and low of today is Rs. 21 then we will have a gap of Rs. 2 which will be seen in the chart. Gaps have different interpretations depending on the types they are and when the occur.

Three types of Gaps:


1) Breakaway Gap- Breakaway gap usually occurs after price consolidation for a significant amount of time. These are bullish signal and in most of the cases major portion of the gaps is left unfilled and price don't come back to the point of resistance. Generally, heavier the volume after such gaps less are the chances of the gap being filled or the price coming back downwards. These gaps act as support in subsequent corrections and when such gap support is broken downwards its a very bearish signal. Breakaway gaps occur at the beginning of the trend after price consolidation.


2) Runaway or Measuring Gap: Unlike breakaway gaps which occur in the beginning of a trend run away gaps occur in the middle of a trend and by measuring its distance from the last consolidation we can have a general idea of the upward or downward movement left. In a uptrend, runaway gaps signal strength while in a downtrend, they signal weakness. Like breakaway gaps these too provide support or resistance as the case may be incase of trend reversal. Have a look at its example:

So, as we can see the major difference between breakaway gap and runaway gap is that the former occur after price moves sideways for some amount of time while the later occur in the middle of a trend. The charts below show how gaps act as support & resistance:


As seen from above charts a gap down act as a resistance for subsequent upmove and a gap up act as a support in case of subsequent correction or downside movement.

3) Exhaustion Gap: Once we have spotted the breakaway gap and runaway gap in a trend we must start looking for Exhaustion Gap. A exhaustion gap occurs at the end of the trend and gets filled up very quickly means after a gap up on one day the price corrects and come back downwards and covers the gap. When such a thing happen its  a very bearish signal in a uptrend. Let's have a look at the chart:


So, as we can see in above chart the gap got filled by correction within next few sessions and this was a bearish signal that we got and subsequently the price started correcting downwards.

The following charts will help you understand all three gaps in a single chart:



The Island Reversal:

Having understood the gaps, we are now in a position to understand Island reversal. After the exhaustion gap occurs price generally moves in a range for a couple of weeks before gaping downwards. Such a situation leaves few day's price action in between two gaps looking like a island surrounded by space of water. The exhaustion gap upside and the breakaway gap downwards completes the island reversal pattern and confirm the trend reversal. Following charts depicts the island reversal pattern 




Island reversal can also form in a downtrend have a look at these charts:


The following chart shows both kind of island reversal pattern in a single chart:



I hope I was clear with it. Having learnt about charting, Trend Analysis, Support & Resistance, Trend Lines, Channels & Price Gaps we are now all set to move to Chart Patterns. If you are new here or have missed our previous posts, please go through them now so that you can follow our subsequent lessons easily. Your comments/ suggestion/ feedback on the same are always welcome.

Happy Learning
The Stock King
Previous
Next Post »

6 comments

Write comments
Ajay
AUTHOR
March 1, 2015 at 9:52 AM delete

It is really worth learning what you are teaching. Thnx bro.

Reply
avatar
gajendra gaja
AUTHOR
March 1, 2015 at 11:14 PM delete

Nice one Abhi bro , but time period required to measure the gap are ????

Reply
avatar
gajendra gaja
AUTHOR
March 1, 2015 at 11:19 PM delete

Nice one Abhi bro , but time period required to measure the gap are ????

Reply
avatar
March 2, 2015 at 7:33 AM delete

bro gaps will work for any time period................. i usually use 9 month charts for analyzing gaps

Reply
avatar
anirudh jain
AUTHOR
March 9, 2015 at 8:36 PM delete

sir kindly see lincoln pharma chart Do it represent island reversal pattern ???

Reply
avatar
March 9, 2015 at 8:53 PM delete

no bro in case of lincoln there a gap only on one side for island reversal we need gaps on either sides

Reply
avatar