Today's Quote: “Confidence is the feeling you have before you understand the situation." Unknown.

A “gap” is a term used to describe the condition when a stock opens at a price other than it closed the prior day. The word “gap” refers to the gap that is left in the daily chart. The empty space from yesterdays close to today’s open (even though they can gap into the prior bar causing an ‘overlap’). Gaps can be either up or down. They can happen to all stocks, listed or NASDAQ.

The gap is measured from the prior days 4:00 P.M. closing price to the current days 9:30 A.M. opening price. All eastern standard time. The post market activity and pre market activity do not affect the ‘gap’ for our purposes. Stocks can trade after market hours through ECNs, (Electronic Communication Networks), until 8:00 P.M. and pre market starting at 8:00 A.M., but this is currently not considered ‘normal’ market hours.

For example, stock XYZ closes at 4:00 P.M. EDT at 37. It trades in after market hours up to 38. The next day at 8:00 A.M. EDT it starts trading at 38.5 and trades up to 39.5. By 9:30 the stock is all the way back down to 37.10. The “gap’ as we measure it is only 10 cents. All those post and pre market trades do not matter. The stock traded, and people made and lost money, but the gap is not affected.

What causes gaps? Usually it is news driven. Individual stocks can gap up or down due to news such as earnings reports, earnings pre-announcements, analysts upgrades and down grades, rumors, message board posts, CNBC, key people in the company commenting or buying/selling the company stock.

Groups of stocks or the whole market may gap up or down due to various economic reports, news on the economy, political news, or major world events. This news can cause many individual issues to gap with the market. Many big name stocks move very closely with the market. Some may be in the sectors that are most affected by the news.

These are some basics based on many questions we receive about gaps. In addition, there are several myths about gaps. Gaps do not have to be filled. Gap ups are not always bullish, and they are not always faded. Gap downs are not always bearish. It all depends on several aspects of the chart patter at the time. Gap play can bring many excellent strategies and opportunities to the trader, once properly mastered.