Gap Down

A gap down occurs when a stock opens below the previous day's low, creating a visible gap on the chart where no trading occurred. Gaps happen because of overnight news, earnings misses, or pre-market selling. They can signal strong bearish momentum, but also potential buying opportunities if the gap fills — context determines which.

Pattern Anatomy

• The current candle opens below the previous candle's low
• Creates a price gap — a range where no shares were traded
• The gap is the space between the previous candle's low and the current candle's open (or high, if also below)
• Gaps can be "filled" later if price recovers to trade through the gap area

How to Interpret

• Breakaway gap: Start of new downtrend, often on high volume — bearish
• Continuation gap: Middle of existing downtrend — trend acceleration
• Exhaustion gap: End of downtrend, declining volume — potential reversal/bottoming
• Gap downs on earnings are the most common — bad results or lowered guidance
• Panic selling often creates oversized gap downs that partially fill within the same day

Expert References

• Thomas Bulkowski — gap research found that gap downs driven by earnings announcements are more likely to continue in the gap direction than gaps from general market selling
• Edwards & Magee — classify gaps by type (breakaway, continuation, exhaustion) in their foundational technical analysis work
• Gap downs often trigger stop-loss cascades, amplifying the initial move

Controversy & Limitations

• "Gaps always fill" is oversimplified — many gaps fill eventually, but some never do, and the timeframe can vary from hours to years
• Pre-market and after-hours trading may partially fill gaps that appear open on daily candles
• Only detected on stock daily data — crypto and forex gaps are rare and not scanned
• Panic gap downs can create buying opportunities (mean reversion) or be the start of a sustained decline — the gap alone doesn't distinguish between the two