Price gaps are simply areas on the bar chart where no trading has taken place. In an uptrend, for example, prices open above the highest price of the previous day, leaving a gap or open space on the chart that is not filled during the day. In a downtrend, the day's highest price is below the previous day's low. Upside gaps are signs of market strength, while downside gaps are usually signs of weakness. Gaps can appear on long term weekly and monthly charts and, when they do, are usually very significant. But they are more commonly seen on daily bar charts.
Several myths exist concerning the interpretation of gaps. One of the maxims often heard is that "gaps are always filled." This is simply not true. Some should be filled and others should­n't. We'll also see that gaps have different forecasting implications depending on which types they are and where they occur.
Three Types of Gaps
There are three general types of gaps—the breakaway, runaway (or measuring), and exhaustion gaps.
The Breakaway Gap. The breakaway gap usually occurs at the completion of an important price pattern, and usually signals the beginning of a significant market move. After a market has com­pleted a major basing pattern, the breaking of resistance often occurs on a breakaway gap. Major breakouts from topping or bas­ing areas are breeding grounds for this type of gap. The breaking of a major trendline, signaling a reversal of trend, might also see a breakaway gap.
Breakaway gaps usually occur on heavy volume. More often than not, breakaway gaps are not filled. Prices may return to the upper end of the gap (in the case of a bullish breakout), and may even close a portion of the gap, but some portion of the gap is often left unfilled. As a rule, the heavier the volume after such a gap appears, the less likely it is to be filled. Upside gaps usually act as sup­port areas on subsequent market corrections. It's important that prices not fall below gaps during an uptrend. In all cases a close below an upward gap is a sign of weakness. (See Figures 4.23a and b.)

11 [Island Reversal Top
IBreakaway Gat
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Downside Breakaway Gap
Exhaustion Gap
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Runaway (or Measuring) GapFigure 4.23a The three types of gaps. The breakaway gap signaled the completion of the basing pattern. The runaway gap occurred at about the midway point (which is why it is also called the measuring gap). An exhaus­tion gap to the upside, followed within a week by a breakaway gap to the downside, left an island reversal top. Notice that the breakaway and run­away gaps were not filled on the way up, which is often the case.
The Runaway or Measuring Gap. After the move has been under­way for awhile, somewhere around the middle of the move, prices will leap forward to form a second type of gap (or a series of gaps) called the runaway gap. This type of gap reveals a situation where the market is moving effortlessly on moderate volume. In an uptrend, it's a sign of market strength; in a downtrend, a sign of weakness. Here again, runaway gaps act as support under the mar­ket on subsequent corrections and are often not filled. As in the case of the breakaway, a close below the runaway gap is a negative sign in an uptrend.
This variety of gap is also called a measuring gap because it usually occurs at about the halfway point in a trend. By measur­ing the distance the trend has already traveled, from the original trend signal or breakout, an estimate of the probable extent of the remaining move can be determined by doubling the amount already achieved.
The Exhaustion Gap. The final type of gap appears near the end of a market move. After all objectives have been achieved and the other two types of gaps (breakaway and runaway) have been iden­tified, the analyst should begin to expect the exhaustion gap. Near the end of an uptrend, prices leap forward in a last gasp, so to speak. However, that upward leap quickly fades and prices turn lower within a couple of days or within a week. When prices close
under that last gap, it is usually a dead giveaway that the exhaus­tion gap has made its appearance. This is a classic example where falling below a gap in an uptrend has very bearish implications.
The Island Reversal
This takes us to the island reversal pattern. Sometimes after the upward exhaustion gap has formed, prices will trade in a narrow range for a couple of days or a couple of weeks before gapping to the downside. Such a situation leaves the few days of price action looking like an "island" surrounded by space or water. The exhaus­tion gap to the upside followed by a breakaway gap to the down­side completes the island reversal pattern and usually indicates a trend reversal of some magnitude. Of course, the major signifi­cance of the reversal depends on where prices are in the general trend structure.