On the left, ANZ posted a weekly gap down in May 2015 that ended six years of gains.
The Weekly gap in FMG during March 2014 lead the price down to historic lows of December 2016.
On the right, the daily gap down ended eight years of gains in Credit Corp CCP.
The chart of CCP also displayed a gap down on open on 2 February, which was followed by a 16% decline, until the primary trend resumed approx. four months later.
A short-term view of gaps as a trading opportunity
For the short-term traders, gaps can be used a little differently and can offer an intimate trading strategy. By 'short-term' I refer to traders that use intraday strategies of up to one or two days holding time.
The opening price gap can provide some excellent trading opportunities for the nimble short-term trader on both the long and short side of the market.
However, it does require some reverse thinking and action. From a textbook point of view, when a stock gap is higher on the open it’s a sign of strength and buyers are in control. However, we must consider the different type of market participants, some being long-term holders and others only trading for quick profits.
In Example 1 (below) we can see from the close trading period following (1) gapped open and sold back into the first range. The following trading period gapped open lower and traded back higher.