Gaps by Thom Hartle and Melanie F. Bowman
Occasionally, trading leaps over a range of prices to reach a new level, leaving a blank space in the price chart. If these spaces are wider than the usual 1/8- to 1/2-point difference in bids, they imply that significantly more is yet to come. When chart gaps are no wider than the usual difference between bids, on the other hand, they provide no information.
Gaps appear most frequently in daily charts, where every day is a new opportunity to trade higher or lower than the previous day's high or low. A monthly chart, in contrast, offers a very narrow window in which gaps can appear. Only a gap that occurs at month-end will show up on the monthly chart, and this rarity alone gives such a gap significance.
The daily charts of medium- to high-priced stocks with normally low trading volume frequently produce gaps without technical significance. The bidding is simply too thin to fill all of the price range. Dividends, too, will artificially create insignificant gaps that are merely a change in the stock's book value, not a trend signal.