If a company releases an unexpected positive news bulletin, this might not only lead to a gap up but also an extended move up that lasts for several days. Opposite to exhaustion gaps, we have runaway gaps that happen when we have a sudden or sharp move from a base or consolidation. Buyers take control and the “vacuum” forces the buyers to pay more to tempt sellers to sell. Why does this happen? It happens because most of the sellers are gone (or finished selling) and the marginal amount of sellers dries up. However, the market had anticipated a weak report, and the price goes straight up from the open after it has gapped down. Typically, these happen after extended moves either up or down.įor example, a stock might have fallen many days in a row, and on day number x the company publishes an earnings report that is weak and gaps down substantially at the open. One group of gaps are often labeled “exhaustion gaps”. Most of the action in the market is just noise and randomness, and this obviously makes the overnight gaps random: they are “common”. This means that they happen frequently and have no or very little significance. Most of the overnight gaps are “common gaps”. In the stock market, almost all gains over the last 30 years have come from owning stocks from the close to the next open (please read more in the article linked above). Night strategies trading (overnight edges/strategies).This can also lead to very profitable trading strategies overnight (from the close to the open), something we have covered in a previous article: Gaps happen because news and imbalances accrue between the close and the open, and the price opens higher or lower the next day. The chart above is an overnight gap and is the most frequent. However, they are most frequent on daily charts. The above is a daily chart, but gaps happen in all time frames – even intraday charts when news is published. Gaps can occur in any time frame there is. In the trading language, this is called a “gap down”. This chart shows the gaps in the ETF with the ticker code EWA during March 2020 when the Covid-19 mess struck:Īs you can see, EWA closes around 19 and opens the next day at below 17 – a pretty big gap down.
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