What is an exhaustion gap?

An exhaustion gap formation is a gap, which is usually found at the end of an impulsive move. One of the most important elements of this pattern is the reversal. It occurs after a rapid rise in a asset’s price begins to fade away.   Usually, this gap is a result of a major fundamental event, for instance earnings result, which facilitate huge public attention and increased trading volume (see photo below).   This formation is very easy to identify and then trade. They are characterized by high volume and a big price difference between the last day’s close and the new opening price. One could easily mistaken an exhaustion gap for a runaway gap. The difference is the enormously high volume of the exhaustion gap. For instance, look at the picture below and at the bar showing volume at the bottom of the photo. A sudden change in the volume is too much to handle for a market, and it creates a gap. Being able to recognize exhaustion gaps will allow you to take a position in an asset in anticipation of the gap reversing. In general you confirming the pattern by identifying a gap, so when the trend reverses, the opposite side pushes the price and it gaps opposite to the trend.