What is a Gap Up? Definition, Types, and Example
A gap up occurs when a stock opens above the prior session's high, leaving an untraded price void on the chart, usually driven by overnight news such as earnings or guidance.
What is a Gap Up?
A gap up is an opening price above the previous session's high, producing a visible void on the chart where no trades occurred. It happens because order flow between the close and the open — earnings, guidance, FDA decisions, macro data, takeover bids — reprices the stock before regular trading resumes. The gap down is the inverse. Gaps are the purest expression of supply-demand imbalance: buyers are willing to pay prices the market never tested.
Types of Gaps and How to Classify Them
Classical technical analysis (Edwards & Magee) divides gaps into four types:
1. Common gap: small gap inside a range, fills within days, no significance.
2. Breakaway gap: gaps out of a base or pattern on heavy volume; starts a new trend and often never fills.
3. Runaway (measuring) gap: occurs mid-trend; projects a target equal to the move from the pattern start to the gap, added to the gap price.
4. Exhaustion gap: gaps after an extended move on climactic volume, then reverses; marks the end of the trend.
Sizing matters: traders measure the gap as a percentage — (open − prior close) ÷ prior close. A gap above 4% on a large-cap or above 10% on a small-cap qualifies as significant. Whether the gap holds is judged against the prior close: a "gap and go" never trades back to it; a "gap and crap" fades through it within the first hour.
Worked Example
On February 22, 2024, NVDA closed at $674.72, reported blowout earnings after the bell, and opened February 22's session following at roughly $750, trading to a high of $785.75 — a breakaway gap of about 11% that never filled; the stock continued to $974 over the next month. Contrast with SMCI, which gapped up repeatedly through early 2024 in runaway fashion from $300 to over $1,200, then printed an exhaustion-style gap in March 2024 that reversed and began a 70% decline.
When Traders Use It
- Gap-and-go momentum: buying the opening-range breakout of a large earnings gap with the gap fill as the stop.
- Gap fade: shorting gaps into major resistance when premarket volume is thin and the catalyst is low quality.
- Earnings drift: academic post-earnings-announcement drift shows gap-ups on earnings beats continue higher for weeks; quants trade this systematically.
- Risk management for holders: a gap against a position bypasses stop orders — stops fill at the open, not the stop price, producing severe slippage.
Limitations and Common Misconceptions
- "All gaps fill" is false. Breakaway gaps routinely stay open for years. The gap fill heuristic applies mainly to common gaps.
- The gap size at 9:30 is not the signal; the first 30–60 minutes of volume and whether the prior close holds determines the trade.
- Overnight and premarket moves are not the gap — only the official open versus the prior close counts for classification.