Price Action: Gaps and the Essential Understanding of Trend Momentum

I. What Is a "Gap"?

A gap is an "empty space."
It is the space between the current price and any support or resistance.

Support or resistance can be any bar's high, low, open, or close,
it can come from the current bar or from an earlier bar,
and it can also be a moving average, a trendline, or a channel boundary.
Many times, these supports or resistances seem very minor,
but the gap is often highly significant.

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II. The Signal of an "Exhaustion Gap"

A large bull bar appears at the end of a bull trend,
its close is above the high of the previous bar, forming a gap.
Then price falls back and drops below the prior high, and the gap is filled.
This structure is called an "exhaustion gap."

It is not a definitive signal of a trend reversal,
but rather represents the bulls being temporarily exhausted,
who will usually rest for a few bars before trying to enter again.

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III. Strong Gaps and Trend Initiation

When you see a large bull bar,
and its close is far above all highs on the left,
this indicates a strong initiation signal.

It may mean the trend has just begun.
Bulls will add to positions on the first pullback,
while bears may cover their short positions with stop losses.
The market forms a consensus buy point.

This type of structure is the signal for trend initiation,
whether you call it a "gap," "breakout," or "trend starting point,"
it represents that market forces have already tilted to one side.

Behind the gap is the market's attitude.
The larger the bar, the less resistance, the stronger the trend.

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IV. "Valid Gaps" and Trend Continuation

If a pullback occurs after a large bull bar,
but the pullback's low does not drop below the prior high, and the gap remains,
then it is a "valid gap."

This type of gap usually brings:

• Trend continuation

• Measured move target

• Bulls in control

• Bears lacking suppression power

Use the pullback's lowest point as the stop loss,
and use the height of the gap bar as the basis to project a two-leg measured move.

If after reaching the measured target, a long upper shadow, high-level consolidation, or large bear bar appears,
this indicates bulls are beginning to take profits and bears are attempting to regain control.

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V. Conclusion

Gaps are not mysterious chart phenomena,
but rather the visual expression of trend forces.

When they are accompanied by pullback confirmation, follow-through bars, and sustained volume,
they are often the strongest signals of a trend;
when they appear at the end of a trend without continuation,
they may be a precursor to exhaustion.

The key is not what they are called,
but how you understand their role within the structure.