Definition
The term breakaway gap refers to a significant gap appearing in the historical price chart of a security. Breakaway gaps signal the beginning of a new price pattern.
Explanation
Technical analysts will examine a variety of historical patterns for a security, including their price over time. A breakaway gap is one of several patterns indicating a shift in the market's sentiment towards a security. They are usually the result of a material event such as the announcement of a merger / acquisition, or beating analysts' earnings estimates. This type of gap has the following characteristics:
On a historical price chart, a breakaway gap will appear as an empty space occurring between trading periods.
Prior to a breakaway gap, the security's price will trade in a relatively narrow range and will not exhibit an upward or downward trend. A breakaway gap is confirmed if the security exhibits an upward or downward trend following the appearance of the gap.
A breakaway gap will also be accompanied by an increase in trading price volatility as well as an increase in trading volume if the gap indicates an upside trend.
Generally, this gap takes one of two forms
Upside Gap: associated with positive news such as beating earnings estimates; investors' demand for the security increases, thereby driving up the price of the security and trading volume.
Downside Gap: associated with bad news such as missing earnings estimates; investors' demand for the security declines, thereby driving the price of the security down.
Related Terms
The term back months refers to any set of futures contracts for a given commodity that expire in a month that is different than the front month. Futures contracts will have a number of dates in the future during which contracts will expire.
Moneyzine EditorJanuary 8th, 2024
The term front month refers to the expiration month of an active futures contract with the shortest time to maturity. The front month of a futures contract will vary with the contract's underlying asset.Moneyzine EditorJanuary 18th, 2024
The term blow off bottom refers to extraordinarily high trading volume in a single session that is associated with the end of a downward price trend. A blow off bottom can be seen in charts, and is used by technical analysts to predict price trends.Moneyzine EditorJanuary 8th, 2024
The term blow off top refers to extraordinarily high trading volume in a single session that is associated with the end of an upward price trend. A blow off top can be seen in charts, and is used by technical analysts to predict price trends.Moneyzine EditorJanuary 8th, 2024
