Exhaustion gaps are those that happen near the end of a good up or down trend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day’s close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume.

It is almost a state of panic if during a long down move pessimism has set in. Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise if they happen during a bull move, some bullish euphoria overcomes trades and they cannot get enough of that stock. The prices gap up with huge volume, then there is great profit taking and the demand for the stock totally dries up. Prices drop and a significant change in trend occurs.

Exhaustion gaps are probably the easiest to trade and profit from. In the chart, notice that there was one more day of trading to the upside before the stock plunged. The high volume was the giveaway that this was going to be either an exhaustion gap or a runaway gap. Because of the size of the gap and an almost doubling of volume, an exhaustion gap was in the making here.