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Breakout vrs Breakout Gap

What is the market psychology difference between a normal breakout and a breakout gap?


  • markdmarkd mod
    edited October 2020
    Conventional wisdom is that a breakout on low volume is weak and more likely a top than a continuation, and a breakout on strong volume is likely to continue. A weak volume breakout is likely pros looking for stops above the market.

    Gaps in general result from an imbalance of orders - a gap up means no sellers, a gap down means no buyers. When one side disappears, its usually because of news - like the recent tweets on the stimulus talks - or, it could be something like FDA approval, or surprise earnings, etc. Of course sometimes there is no news in an individual stock, but somebody knows something or they wouldn't come on the market with so much cash they wipe out all the asks, or so much stock they clean out all the bids.

    So a breakout gap is likely the result of unexpected news that changes everyone's mind at once (especially the shorts), whereas a normal breakout is the result of optimism that has been building over several days or weeks, during which time sellers readily find buyers, so prices don't go down, so shorts give up, leaving the field clear for buyers.

    Neither type necessarily succeeds, but the normal breakout on strong volume probably has better odds. News can be wrong, and a breakout that is a short panic may not mean there is really sustained interest. Once the shorts are gone, prices may just fall back.

    One other cause of gaps is the symbol trades on another market while its our market is closed - for instance ADRs. These gaps don't have any technical meaning - they don't represent an imbalance of orders - they mean there is data missing.
  • Thks..Good summary
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