BQLearning: Decoding Breakout, Breakdown, Gap Up & Gap Down

BQ Learning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.

In this series, we explain how technical analysis works; how to identify trading opportunities through it and decode various concepts associated with it.

Breakout

A breakout is a breach of the previously recorded highs. It can be a price breakout or a volume breakout. It occurs when a stock’s price or volume exceeds the previous resistance level.

Price breakouts supported by heavy volumes suggest a bullish conviction and more buyers are likely to emerge.

Breakdown

A breakdown is a price movement below an identified level of support. Traders sell a security when it breaks below a support level as a further downside is anticipated.

It’s a clear indication that the bears are in control and it often signals the start of a downtrend.

Gap Up & Gap Down

Gap is a break between prices on a stock chart. It occurs when the price of a stock makes a sharp move up or down with no trading occurring in between.

Opening gaps result from a newsworthy event that happens after trading is over. This results in an imbalance in supply and demand when the market opens the next day.

If a stock opens much higher than its previous closing price, it is said to have a ‘gap up’ opening. That could in turn signal the start of a new trend if the gap up open has occurred post a prolonged period of consolidation.

The reverse holds true in case of a ‘gap down’ opening for a stock. Apart from signaling the start of a new trend, gap openings indicate reversal of previous trends.

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