Do Stock Market Gaps Always Get Filled?

Price movements often capture the attention of investors. Among these, ‘price gaps’ are a frequently observed phenomenon on stock charts. A common question is whether these gaps invariably ‘fill’ over time. This article explains price gaps, their occurrence, the concept of gap filling, and whether all gaps are indeed filled.

Understanding Price Gaps

A price gap refers to a visible empty space on a stock’s chart, indicating a significant difference between the closing price of one trading period and the opening price of the subsequent period. This discontinuity occurs because no trading activity took place within that specific price range. Gaps can appear when a stock opens significantly higher (gap up) or lower (gap down) than its previous close.

These gaps form due to unexpected news or events that occur outside regular trading hours, such as after the market closes or over a weekend. Common catalysts include surprising earnings reports, significant company announcements like mergers or acquisitions, or broader economic data releases. Geopolitical developments or natural disasters can also trigger sharp shifts in market sentiment, leading to gaps.

There are four types of gaps, each offering different insights into market behavior. Common gaps appear within trading ranges and do not signify major trend changes. Breakaway gaps occur when the price breaks out of a consolidation pattern, signaling the beginning of a new price trend. These appear with strong momentum and substantial trading volume.

Runaway gaps, also known as measuring gaps, emerge in the middle of an established trend, indicating continued momentum. They suggest strong conviction among buyers or sellers. Exhaustion gaps appear near the end of a prolonged price trend, signaling that the trend is losing momentum and a potential reversal is imminent.

The Phenomenon of Gap Filling

‘Gap filling’ describes the tendency for a security’s price to return to and trade within the area of a previously created gap. If a stock gapped up, filling the gap means its price eventually declines to cover the empty space. Conversely, if it gapped down, filling implies the price rises to cover the initial decline. This return to the pre-gap price level is seen as a market correction.

Market dynamics contribute to this phenomenon. An initial price surge or drop that creates a gap can be an overreaction to news or events. As the market processes information, traders might realize the initial impact was exaggerated, leading the price to revert. Profit-taking by traders who benefited from the initial gap can also push prices back towards the gap area.

The concept of gap filling also has a psychological component, influencing market behavior. Traders and automated algorithms monitor these unfilled gaps, considering them as potential price targets or areas where support or resistance might be retested. This collective focus can create a self-fulfilling prophecy, as market participants actively trade to ‘fill’ the void. The absence of previous trading within the gap zone means no established support or resistance levels, potentially allowing smoother price movement back into that range once a reversal begins.

The Nuance of Gap Filling

Despite widespread belief, stock market gaps do not always get filled. While many gaps do fill over time, it is a statistical probability rather than a guaranteed outcome. The notion that all gaps must eventually fill is a common misconception, leading to flawed trading assumptions.

The likelihood and speed of a gap filling are influenced by several factors, including the type of gap. Common gaps and exhaustion gaps are more likely to fill, doing so relatively quickly within a few days or weeks. In contrast, breakaway gaps and runaway gaps do not fill, or they may take a very long time, as they represent stronger directional moves and new trends. For instance, a breakaway gap supported by high trading volume is less likely to be filled.

Overall market conditions also play a role. In highly liquid markets, gap fills may occur more quickly. Market sentiment, whether broadly bullish or bearish, can influence the price’s tendency to return to the gap. Trading volume accompanying the gap’s formation provides clues; high volume supporting the gap’s direction suggests continuation rather than a quick fill, while low volume can signal an exhaustion gap or an impending fill.

The timeframe for a gap to fill can vary significantly. Some gaps may fill within the same trading day, while others might take days, weeks, months, or even years. Some gaps may never fill at all, particularly those indicative of strong, sustained trends. Therefore, ‘gap filling’ is a tendency, not an unbreakable rule, and its occurrence depends on contextual factors and the gap’s characteristics.