The Hindu Business Line : Runaway or measuring gap

Runaway or measuring gaps are a familiar sight on technical charts. They are also otherwise known as continuation gaps. Following a breakaway gap the price-move begins to progress for awhile, somewhere in the middle of the move the price jumps forward to shape another gap or a sequence of gaps called the runaway or measuring gap.

These gaps occur when the up or the down-trend is fairly well established. Sharp increase or decrease in investors’ interest in a stock results in the formations of such patterns.

The upside runaway gap is formed by the trader who did not buy during the initial move of the trend and was waiting for the stock price to come down.

As the realization of these expectations appear increasingly remote, a sudden increase in buying interest (as the trader gets in a state of panic), pushes the stock price much higher with an upside gap.

Such gaps can also be formed by a significant news event pushing the stock price up or down.

Runaway gaps act as support in the market. When the stock price corrects, the decline gets support in the area of the gap and a rebound is likely to occur from there.

However if the gap is filled it signals that the prevailing trend is losing strength and can end soon. The reverse is true in a down-side runaway gap. An up-trend will face resistance from such gaps and closing of these gaps will denote that the up-move is gaining force.

It is also known as measuring gap for the reason that it typically takes place at the middle or halfway point, through the trend. This gap helps us to decide how far the trend can extend.

Now, let’s understand runaway gaps with an example. Refer to the chart of Apollo Group (NASDAQ:APOL) given below. On October 28 the company announced its fourth quarter results. Apollo Group’s adjusted profit of 75 cents per share exceeded analysts’ projections of 67 cents per share. This news event increased the interest of the trader and the stock opened with a runaway gap on October 29, accompanied with high volume. We notice good volume traded before and after the formation of runaway gap.

Refer the Amrutanjan chart, which shows runaway gap in a downtrend. — Yoganand D.

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