Gap Fill Stocks

Gap Fill Stocks Meaning

Gap-filled stocks must be retraced to a previous candle that’s opened higher or lower than the current price. It’s been said all gaps must be filled. When that happens is anyone’s guess, however. But if a stock gaps up, chances are it’ll consolidate at some point to “fill the gap.”

Gaps are a result of fundamental or technical factors. For example, the most common reason gaps appear is when there is an imbalance between supply and demand. Up at the open, if there’s aggressive buying or down with selling that outpaces the current supply at the previous closing price. 

Gaps can also occur due to the overnight sentiment buzz, like reaching a new high in the previous session. The buzz then pushes a stock higher at its opening. Or there’s big after-hours news that changes the overnight sentiment. Gap-fill stocks can also form if a large player(smart money) attempts to pass a support or resistance level. 

What Is a Gap Fill?

Gaps in a price chart are areas where the price pattern quickly jumps up or down for any asset with little trading volume (two adjacent candles where the first’s closing price and the second’s opening prices are significantly different.) In volatile markets, we, as traders, can benefit from these large positive and negative jumps in an asset’s price.

But we have to recognize those and turn them into opportunities. Gaps are filled when they return to their previous levels. We’ll go over what’s happening with gap-fill stocks. And how you can profit from gaps and their fills. 

Gap Fill Stocks Example

Four Types

  • Common gaps– an undefined area where the price has gaped
  • Continuation gaps- form I n the middle of a price pattern, signaling an influx of buyers or sellers who agree about the asset’s future price direction and will continue that direction; these are also known as runaway gaps
  • Breakaway gaps– form at the end of a price pattern, signaling the beginning of a new trend
  • Exhaustion gaps– form near the end of a price pattern, signaling an attempt to push past support or resistance

Do Stock Gaps Always Fill?

Gap fill stocks are considered “filled” when their price retreats to the original pre-gap level. Will gap fill stocks happen every time? Mostly, they do. But there are outliers. Sometimes, low-volatility penny stocks will never fill a gap.

Filling on the same trading day is called “fading” and can be due to some overnight news that causes a gap, but then additional news kills the gap created, or cooler heads prevail, returning the price. Filling usually happens for one of three reasons:

  • Support and resistance– The asset’s price is pushed back from technical resistance
  • Over Optimism/Pessimism– There is a correction after irrational exuberance
  • Exhaustion Gaps- This price pattern is the most likely to get filled as they signal the end of a trend. The other types of gaps usually indicate a continuing direction.

Trading of gap fill stocks is a method to gain the most during the earnings season, where good or bad numbers can have an overreaction.

Gap Fill Stocks Strategies

There are several gap fill stock strategies we traders can take advantage of gaps, and a few of these strategies are more popular than others.  

  • Assuming a potential gap– Some traders buy or sell when fundamental or technical factors favor a gap on the following trading day—for example, selling in after-hours trading when a surprise negative earnings report is released, hoping that a gap is formed the following day.
  • Trading highly liquid or illiquid positions- buying or selling positions when price movements begin, assuming a good gap will continue.  For example, a gap has formed upward with minimal liquidity and little resistance above.  This would follow slightly behind a trader who opened a position on the assumed gap at the beginning of a price movement.
  • Filling/Fading- This is where you find a gap that has formed but hits a brick wall (either a top or bottom) due to weakening or a technical analyst play.  For example, an upward gap was formed due to speculation of an upcoming announcement, but traders will cause the gap to fade by shorting the stock and using technical analysis
  • Post-fill buy/sell- This is when a trader will follow the gap filling, and when the gap is successfully filled, they will buy or sell in the opposite direction when the price reaches any prior support or resistance before the gap. 
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Gap Fill Example

Let’s look at a general gap fill stocks trading example, then a more difficult one. 

With an up gap, the gap is a support level for any pullback.  A lighter volume pullback indicates there is not enough energy to surpass the gap, and the gap becomes a support for a bullish buy. 

How the trade works:

  1. Identify an up-price gap
  2. Wait for the pull back to the prior day’s close and fill the gap(usually a fade).
  3. Buy at this point with a stop order.

Second Type of Pull Back

  1. The price gap formed is just above the previous day’s low (or above the high), and then a strong pin bar is formed, which fills the gap. The volume should be high on the pin bar.
  2. A second price gap up/down and then a retrace filling the gap, taking more than two candles with decreasing volume
  3. Look for a sign of strength/weakness when you enter the position
  4. Price should not close inside the previous day in any five-minute candle
  5. You then place a stop below/above the low/high of the candlestick.
Gap Fill Down Stocks

Key Points

  • Breakaway gap stock should have a high volume associated with them, and exhaustion gaps should have a low volume, so look for it.
  • When a stock starts to fill a gap, it rarely stops because of a lack of support/resistance.
  • Exhaustion and continuation gaps are in opposite directions, so identify them correctly.
  • Retail investors (dumb money) usually exhibit irrational exuberance. Still, smart money (institutional investors) may use this for their gain, so look for the indicators and take positions on a break, not before.

Final Thoughts: Gap Fill Stocks

When earnings are coming out, or news is surprising, you can use a gap-fill stocks trading strategy. Gap filling is an easy-to-identify pattern that can be quite profitable. As always, never put more than you can lose at risk and good luck with all your trades.

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