Gaps usually represent important areas of support or resistance. A Gap Down will indicate different situations based on the context in which it was formed. A Gap Down in a downtrend may indicate a previous level of support has been broken and now forms a resistance level. A Gap Down in an uptrend may indicate an end to, or a reversal of, the prior uptrend. Gaps provide an indication of a financial instrument's SHORT-TERM outlook.
A Gap Down forms when the high for a period (usually a day) is lower than the previous period's low.
Since Gaps represent important areas of support or resistance they can be used to measure the strength of moves. If a price breaks through a Gap it is usually a signal of a significant price move.
Criteria that Supports
Three Gap Downs within a trend indicate a possible end to, or reversal of, that trend. The three Gaps do not have to occur on sequential days, but may form many days apart.