The gap in a gap-up stock is either a “full gap” or “partial gap”.
- A full gap occurs when a stock opens at a higher level than the previous session’s high.
- A partial gap occurs when a stock opens above the previous day’s closing price.
Here’s an example that illustrates the difference between a full gap and a partial gap. During the trading day, the stock of Company ABC closes at $39. However, during the day the stock was trading as high as $41. At the opening bell the next day, the stock opens at $42.50. That stock would be opening higher than both its previous close ($39) and its previous daily high ($41). This would indicate a full gap. However, if the same stock opens at $40, it will only show a partial gap. While closing above its previous closing price of $39, it did not “gap up” above the previous session’s high price of $41.
The importance of understanding the difference between a full gap and a partial gap is about supply and demand which highlights the difference in risk and potential gain. In general, full gap stocks provide a better opportunity for profit over several days.
For example, a full gap means there is usually sufficient desire to buy or sell the stock. This increased demand will be a signal to market makers that there has to be a significant price change to accommodate any orders that have to be filled. With a partial gap, demand might be such that only a small price increase above the closing price will allow buy or sell orders to be filled.
Beyond the terms full gap and partial gap, gaps generally fall into one of four categories:
- Breakaway Gaps – These are gaps that take place at the end of a pricing pattern and signal the start of a new trend. Breakaway gaps will coincide with high volume.
- Exhaustion Gaps – These are gaps that take place towards the end of a pricing pattern and represent a final attempt to set a new high or low. Exhaustion gaps will coincide with low volume.
- Common Gaps – These are gaps that cannot be placed in a price pattern. These simply represent an area where the price has gapped.
- Continuation Gaps – These gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.
It is common for gaps to get filled in naturally. This means the stock price will move back to its original level. Because of the volatility around earnings season, this is typically a time when stocks will make large price movements.
In some cases, investors (usually individual investors) may be overly enthusiastic about a stock. In almost every case, this will result in a correction. Another reason may be due to a lack of support and resistance. Support and resistance lines are technical indicators that traders can use to set price targets. When a stock gaps up, it usually doesn’t leave behind a support or resistance line to anchor that price level. Finally, the type of price pattern can indicate whether a gap will be filled. For example, exhaustion gaps come at the end of a price pattern, making them more likely to be filled. Breakaway and continuation gaps, which are confirming the direction of a trend, are less likely to be filled.
When gaps get filled within the same trading day as they occur, the gap is said to have undergone fading. This is common during times such as earnings season.