Continuation gaps are gaps that appear in the middle of a strong bull move. They are also known as runaway gaps or measuring gaps. I must say that in the first place, we will not know whether a gap is a continuation gap or not. It is only after the price run up is completed and we see things in hindsight that we are able to name that gap as a continuation gap. So why learn it?
The reason is if you think that a gap is continuation gap, you can use it to measure the potential move in the stock. So it helps to set a target for you.
In my opinion, to be considered a good continuation gap, here are some conditions that the gap should satisfy:
The continuation gap can be the result of good news or excellent earnings. Basically, stocks only gap up and continue to run higher when things are good for the stock.
The chart of ADBE above is a good example of what a valid continuation gap looks like. First of all, there was a previous run up in price. The price ran up from about 105 to 125. Secondly, the stock is in a nice uptrend. Thirdly, the gap is not too big. it is visible and easily seen by everyone but it is not too big a gap.
When the stock started to go up after the gap, a good trader can use the height from the base of the breakout to the gap and project it upwards to get a target. See how the stock has already met the gap after 5 months.
The second example above is the chart of AMAT. This stock satisfied all the criterias of a continuation gap. I must say that this is really a textbook example of how the continuation gap can help set a target. When the stock met the price target, the stock immediately came crashing down.
While it is difficult to know whether a gap is going to be a continuation gap or not, it still is great to learn about this chart pattern. Perhaps your stock may be experiencing a gap up. If it continues to ride higher, you can use it as a way to set a price target.
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