Gap up and gap down

A gap up or gap down is a jump in a stock's price between one trading session and the next, leaving a range on the chart where no trading occurred. A gap up opens above the prior session's high; a gap down opens below its low. Many traders loosely use the term for any open well above or below the prior close.

How it works

Gaps happen because news arrives while the regular market is closed. Earnings after the close, FDA decisions, merger announcements, offerings and analyst rating changes before the open all reprice the stock in after-hours and pre-market trading, and the regular session opens at the new level.

Common labels:

• Breakaway gap. Starts a new trend, often on fundamental news.
• Exhaustion gap. Comes late in a move and reverses soon after.
• Gap fill. The price later trades back to the prior close, closing the gap.

Why it matters for traders

The open after a gap is one of the most volatile moments in a stock's day. Some gaps run all day as funds who missed the news buy in; others fade as early buyers take profits. Volume and the nature of the news usually separate the two: a gap backed by heavy relative volume and a fundamental change (an acquisition at a fixed price, a clean FDA approval) is more likely to hold than one driven by a vague press release.

Gaps also expose the limits of protective orders. A stop-loss order cannot stop a loss that occurs while the market is closed; it fills at or near the gapped open.

Example

Hypothetical Northwind Therapeutics (ticker NWTX) trades between $9.40 and $10.20 and closes at $10.00. After the close it announces an acquisition by a large pharma company at $15.00 per share in cash. The next morning it opens at $14.60, a gap up of 46%. With a fixed cash price, the stock is unlikely to fill the gap unless the deal is in doubt.

FAQ

Do gaps always get filled?

No. Many gaps fill within days or weeks, but gaps caused by a fundamental repricing, such as a cash acquisition or a failed drug trial, can remain open indefinitely.