Gaps as potential Support and resistance

In this post in support and resistance series we will discuss about gaps acting as support and resistance. Gaps are formed when price moves up or down sharply with no trading in between. Because of this chart will show a gap in price pattern.

Different types of gaps in chart analysis

There are different types of gaps. It can be classified mainly into 4 types.

Breakway gaps
Exhaustion gaps
Common gaps
Continuation gaps

We will discuss more about these different types of gaps in another post. Here we will consider only one character of gaps, that is acting as support or resistance.

How gaps are normally formed

Normally when price moves in a range, the lower level acts as support and upper level acts as resistance. To break this range, price have breakout with big volume. Sometimes this huge volume breakout can create gaps in chart. This breakout level will now act as new support for upside breakout and resistance for downside break out.

Understanding Gap Formation in Range-Bound Stocks

Oftentimes, a stock will trade in a relatively narrow price band between support on the lower end and resistance on the upper end. This is known as a price range or consolidation area. The support level is where buyers tend to enter, preventing the price from dropping lower. The resistance level is where sellers push back, stopping upward progress.

Breaking Out of the Range

For a stock to break out of this range, it needs significant buying or selling pressure behind it—typically reflecting a shift in market sentiment or outlook. Heavy trading volume comes in to either lift the price above resistance or sink it below support. Sometimes this high-volume thrust happens right at the market open, creating an visible open gap between the prior close and next open.

Other times, the move may happen mid-day but with enough momentum to gap through short-term support or resistance levels on its way higher or lower. These breakout gaps signify traders and investors decisively shifting their viewpoints on the stock’s valuation.

New Price Levels Emerge

After the range breaks and a stock gaps in one direction or the other, former support and resistance levels lose relevance. The price where the stock initially broke out now serves as a new support (if breakout was upwards) or resistance (if breakout was downwards). Any pullbacks towards this breakout level may attract buyer interest for a support level. Meanwhile, rallies towards it could elicit seller interest at this new resistance.

Analyzing volume trends, market events, and sentiment shifts around gap days allows traders to gauge conviction behind new trends. Identifying and properly interpreting gaps in key price areas remain an invaluable skill.

Gaps acting as support or resistance

Gaps will act as effective support and resistance zones. I said zones as we always consider support and resistance as price areas or zones and not a fixed point.
Those who missed the chance to buy in the gap zone will try to buy when price reaches there. They get a second chance to buy. When market reaches the level they will buy and move price up. We know support zones are also called demand zones where buying halts down movement of price and price starts to reverse from there.

Same thing happens in case of resistance. The difference is sellers will be waiting to sell there and thus price falls once reach that levels.

Watch video below from share market Malayalam youtube channel to know more about gaps.

Gaps acting as support and resistance - https://youtu.be/-K75cdk2zuM?si=0oAVmON9dRt16THF