Exhaustion Gap Definition & Trading Strategy

Exhaustion Gap Definition

An exhaustion gap comes at the end of an impulsive move.  The exhaustion gap has an abnormal pickup in volume and then reverses sharply.  An exhaustion gap occurs after an earnings announcement or news release.  This final blow off brings enormous public attention and increased trading activity.  This event provides professional traders and institutions the opportunity to close out large positions.  This mass exodus of the big players causes the sharp reversal in the stock, because after the public gets in, there is no one left to hold the bag.  Exhaustion gaps can occur in both up and down trends.

Exhaustion Gaps Trading Strategy

Exhaustion gaps can be one of the most profitable setups to trade in the market.  The first component of an exhaustion gap is climatic volume.  Secondly the first candle in the setup should close off its high.  This is a sign that the stock is tired and is losing its upward momentum.  If the next bar closes below the first bar, there is good odds that an exhaustion gap is in play.  A stop can be placed above the high of the first bar, and the rest is history.  The stock should immediately begin to fall precipitously without any retracements.  The move down should resemble a falling knife.

Exhaustion Gap Charting Example

Below is an example of an exhaustion gap from BTU.  The stock had run straight up from $76 to $86 and then had a sharp pickup in volume.  This final move up, quickly reversed and the stock dropped 6 points in 2 days.

Exhaustion Gap Charting Example

Tim Ord
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Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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