Trading Breakaway Gaps

12/03/2009 12:01 am EST

Focus: STRATEGIES

Toni Hansen

President and CEO, Trading From Main Street

Breakaway gaps are an excellent form of gap to watch when you're trying to locate securities with a high probability of a trend day. They’re gaps that break the security out of a trading range or congestion zone and are a much stronger confirmation than a non-gap breakout of a range. The gap itself will then serve as support for the security in the case of an upside gap, allowing it to more easily continue in the direction of that gap itself. True breakaway gaps rarely close in the days immediately following the gap day.

Here is a video with more details:

In our GLD, one of our first breakaway gaps heading into the summer took place on May 16, when it came out of this trading range where a number of common gaps took place, but then on the 16th, a gap above the congestion for most of that range. Notice that following the gap itself, the security was not able to completely close the gap from the previous day’s close. It held that closing price and continued with a strong trend day on the upside, even continuing that trend for several days following it.

Notice that volume also increased with this breakout, hence confirming the breakout itself. Another example of a breakaway gap was a little bit of a variation of this. There was this two-wave correction within a larger congestion zone, and then, as that congestion broke free, you can see a gap confirming the breakout of that move. The gap itself took place on the third test of the highest of this trend channel if you draw a trend channel line connecting the initial high of the congestion to the second high of the congestion and then expanded that and extended it into the end of June. Confirming the breakout from this larger congestion move was a continuation pattern into the middle of July.

There was another nice solid pullback into this 20-day simple moving average zone with a lot of overlap from one bar to the next, and then on the 11th of July, our GLD broke higher out of that pullback, out of that congestion with another breakaway gap. Notice the gap again had a very difficult time closing and to move that to a larger continuation pattern on the upside for several days.

The larger breakout continued with a breakaway gap on July 21 with another pullback, this time not quite to the same extent as the previous one, but still a congestion lasting about four days with a break higher out of that range. Even when you do have a closure of the gap, notice that that closure of the gap itself serves as a support zone. We saw this back with the larger breakout, which took place back here on June 30, and again with this breakout and continuation on July 21.

Breakaway gaps are one of my favorite types of gaps to look for when I'm trying to find securities that have a high probability of a trend day, or at the very least, a trend morning because they tend to offer the best follow through on the upside, and on the downside as well when this pattern is flipped over and reversed.

By Toni Hansen of TradingFromMainStreet.com

To learn more about gap trading, check out my Web site at TradingFromMainStreet.com or ToniHansen.com. You can also email me at toni@tradingfrommainstreet.com.

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