GAPS (A Lesson out of the Common Sense Commodities Course)

I’ll give you a short explanation and a chart for each of them. Many people think that all gaps are filled. That’s not true. Some gaps are not expected to fill, but many will. We will cover each one of them.

Gaps are simply places on a chart that did not have a price action that day. As an example, say the low today for Sugar was 9.00, and the next day it opened at 8.00 and did not go above that. There would be a gap (space) in the price that day of 1 cent, between 9 cents and 8 cents. Not complicated at all.


You will find out that some types of gaps are important indicators, and others are not important at all.


1. Common Gaps. These usually occur within a trading range and are not indicative of a major price move. In other words, they are usually insignificant to the overall movement in the market. However, Gaps like to fill. Markets don't like "voids" in them. So most of the time, at some point a Gap will fill like in the chart below. They can be a great place to enter with a limit order or a place for a protective stop.


Some people feel they occur because of a simple lack of interest in the market that day. We will talk about looking at volume (the number of orders placed that day) a little later because it can give you some clues.

2. Breakaway Gaps. A breakaway gap is an extremely reliable indicator. These often occur when a particular price pattern completes. When they do occur, they leave a space that has not been filled in yet. They are usually indicative of a big market move.


Also, when these gaps occur, you will usually, but not always, see a significant increase in the volume that day. Breakaway gaps are not expected to be filled right away and the heavier the volume the day it gaps, the less chance that it will be filled.

The vertical lines at the bottom of the previous chart reflect the volume. Volume is always a day late on the charts because they don’t know what the entire volume was until the day is over. The exception to that is of course on a shorter-term time frame, like a 60-minute chart. As an example, the volume on Tuesday reflects trading done on Monday. We will study volume in more detail later in the course. Notice, the first breakaway gap did not have much of an increase in volume, but the second one did.


The thin wavy red line on the bottom section of the chart, above the green bars, reflects the open interest in this contract. Why do you think we see a big drop in open interest (the total number of “open” contracts that are being traded at that time?)

The answer is that the contract is about ready to expire, and everyone is probably trading the next contract month out and not this one. So you should also be looking to trade the next contract month, not this one.


Pay close attention to this when placing your orders. Make sure the contract has at least 30 days before FND for a position trade. A Swing Trade for a day or so is fine during this time as long as there is a good volume to go with it. Track-n-Trade allows you to place a “line” on the charts for FND. An easy way to find the contract you should be trading is to look at the volume traded that day. Trade the contract with the most volume even if it is not the next contract month away. Some markets have contract months that hardly anyone trades. In that case, you may need to go out another contract month to find the one that has the most volume.


Do you notice a nice trading range forming at the end of the chart? Do you think the resistance at the top of this range is strong or weak? How many times has the price come up to, or almost up to, just above the current price, and headed back down again? Do you see a potential opportunity to short the market if the price hits the top of this range and bounces down again? Did the lack of volume give you any clues? You should see a trading opportunity here. If you don’t, then read the lesson again.


3. Runaway Gaps (sometimes called Measuring Gaps). These don’t happen as often, but when they do, it usually indicates an accelerating trend and a strong bull (or bear) market. Many times these gaps happen on limit-up days, or limit-down days (the maximum amount they allow the price to move, but some markets don’t have any limits), and may continue for several days. Unlike other formations, it does not take a large volume for them to take place either on the upside or the downside. As a matter of fact, they usually start on moderate volume. Do you remember years ago when there was an outbreak of Mad Cow Disease? Due to that there were limit up days for a week or two. If you were not in the market already there was no way to get in either because the market opened and closed immediately on those days.


Most of the time these gaps are not filled right away, but if they are, it's an indication that the move has lost a lot of its strength. A good place to put protective stops in on the top or the bottom (just above or below) of the Gap.


The reason that these are sometimes referred to as measuring gaps is that they will take place midway through a trend. So, if that’s the case, you can “measure” the expected move. Since they often start in the middle of a trend, when you see one you can expect the price to increase an equal distance from the start of the most recent trend to the first runaway gap. In other words, when the move is over, the first gap will have occurred in the middle of the trend. This is not the case in the chart below, however.

4. Exhaustion Gaps. These occur when the price has been rallying or declining over an extended period of time. Exhaustion gaps are not indicative of a continued bull or bear market. As a matter of fact, sometimes just the opposite happens, and you will see a trend reversal. Be careful when you see these because you might think they are the start of a runaway gap. Watch the closing price closely.


Exhaustion gaps don’t happen that often, so don’t waste a lot of time looking for them. To give you an example, I looked through all my charts for over four hours to find two of them to show you.