You may hear that a gap in a trading price bar must be filled. This emphasis on filling the gap is usually nonsense uttered by people who are trying to sound worldly and wise, but really don’t know what type of gap they’re dealing with. Filling the gap means that prices return to the level they occupied before the gap. This figure illustrates filling the gap.
When a gap will be filled, and whether it will be filled at all, partly depends on the type of gap you’re dealing with:
Breakaway gap: Sometimes the price doesn’t return to fill the gap for many months or even years — if ever. When the fundamentals of a security change dramatically, why would market participants sell it back down to the level it was before the big event? Conditions have changed permanently and so has the price of the security. If a company has invented some new must-have product, the new higher stock prices may not be the right price, but the old prices based on the old conditions aren’t right, either.
Runaway gap or common gap: Demand for the stock is normal and not under the influence of news or changing conditions, so the gap may be filled by bargain hunters. Sometimes a gap gets filled because the chatter about “filling the gap” makes it a self-fulfilling prophecy.
How do you know whether a gap will be filled? If it’s a breakaway gap, it probably won’t be filled — at least, not in the near future. If it’s a common or runaway gap, it might get filled or it might not. You need to look at other indicators (such as momentum to confirm whether a price move is at risk of going backward to fill a gap).
