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Exhaustion Gap Chart Pattern

Patrick Stockdale
Written by Patrick Stockdale | May 17, 2022

What Is An Exhaustion Gap Chart Pattern?

In technical analysis, an exhaustion gap is a pattern that forms at the end of a long bullish or bearish trend and it signals a trend reversal in the price of a market. Typically, an exhaustion gap occurs near a market top or a market bottom on a price chart when the opening price of a financial market is higher or lower than the prior closing price.

It signals a change in the dominant trend. For example, if the price of a market gaps up at the end of a bullish trend, an exhaustion candle signals a bearish price reversal.

If the price of a market gaps down at the end of a bearish trend, the exhaustion candle signals a bullish price reversal.

Types Of Exhaustion Gap Chart Patterns

There are two types of exhaustion gap patterns. The two types of exhaustion gap patterns are:

  • Bullish exhaustion gap: A bullish exhaustion gap pattern is when there is a dominant bearish trend and the price of a market gaps down to further lower prices, exhausts the selling pressure and then reverses from declining prices to increasing prices.
  • Bearish exhaustion gap: A bearish exhaustion gap pattern is when there is a dominant bullish trend and the price of a market gaps up to even higher prices, exhausts the buying pressure and then reverses from increasing prices to decreasing prices.

Exhaustion Gap Pattern Components

Exhaustion gap pattern components

In order to identify an exhaustion gap pattern, there will need to be certain components visible on a price chart.

The components of an exhaustion gap pattern are:

  • A long bullish or bearish trend in the price: There will need to be a long period of a bullish or bearish price trend in the market. This is what is required to eventually create the exhaustion in buying or selling pressure later on.
  • A price gap up or down: After the long period of trending markets, there will need to be a gap up or gap down in the same direction as the original trend.
  • An increase in the volume (optional): This is an optional component. If there is an increase in the volume, it can be an added signal that there is an exhaustion in the buying or selling pressure after a very long trend.

Exhaustion Gap Chart Pattern Examples

Below are visual examples of an exhaustion gap chart pattern.

Example Of A Bullish Exhaustion Gap Pattern

Bullish exhaustion gap pattern

On the above price chart of Netflix stock, two bullish exhaustion gaps form. This leads to a bullish reversal from the prior bearish downtrend.

There was an increase in selling pressure as the price gapped down and formed the exhaustion gaps.

A bullish exhaustion gap forms at the end of bearish trends and on the price chart of Netflix stock, it leads to a new bullish trend.

Example Of A Bearish Exhaustion Gap Pattern

Bearish exhaustion gap pattern

On the above price chart of Zoom Video Communication stock, a bearish exhaustion gap formed (marked with the arrow).

There was a large bullish trend originally before the exhaustion gap. After the bearish exhaustion gap formed at the end of the bullish trend, the price of the market quickly reversed from a bullish trend to a bearish trend.

This leads to a long period of price declines.

Example Of An Exhaustion Gap Pattern In The Stock Market

Exhaustion gap pattern in stock market

On the above daily price chart of the Nasdaq 100 Index, an exhaustion gap forms.

This results in a price reversal from bullish to bearish and a sharp and steep decline in the price over the next few weeks and months.

Example Of An Exhaustion Gap Pattern In The Commodities Market

Exhaustion gap in the commodities market

On the daily price chart of Gold futures above, an exhaustion gap formed near the market bottom at the end of a bearish trend.

It signals an exhaustion of the selling pressure and the markets reverses to a new bullish trend.

How To Find An Exhaustion Gap Chart Pattern

The methods for finding an exhaustion gap pattern in the market are:

  • Use a large percentage mover scanner: Use a scanner to filter for markets that have moved quite a lot. This will highlight the markets that are trending. Then a trader just needs to wait for the exhaustion gap to form.
  • Use a premarket daily gapper scanner: Use a premarket scanner to filter for markets that are gapping up and down. This will show any potential exhaustion gaps forming.

Exhaustion Gap Chart Pattern Benefits

The benefits of the exhaustion gap pattern are:

  • It helps to identify when a trend is ending: An exhaustion gap pattern can indicate when the trend in a market is nearing an end. This can be especially useful for trend-following traders as it indicates to take profits.
  • It's easy to learn: Learning how to find an exhaustion gap pattern is relatively straightforward with few components to spot.
  • It can provide logic and understanding to the price action: An exhaustion gap can help a trader understand what's going on in the market as prices reach exhaustion levels.

Exhaustion Gap Chart Pattern Limitations

The limitations of the exhaustion gap pattern are:

  • It can be hard to get the best entry point: Finding an ideal entry point when an exhaustion gap forms can be hard to do, especially for newer traders.
  • It can fail: Sometimes the exhaustion gap can fail and continue to trend in one direction.

Frequently Asked Questions About The Exhaustion Gap Chart Patterns

Below are frequently asked questions about the exhaustion gap chart pattern.

Is An Exhaustion Gap Pattern Bullish Or Bearish?

An exhaustion gap can be either bullish or bearish depending on where it forms.

If an exhaustion gap forms at the end of a bullish trend, it is a bearish signal. If an exhaustion gap forms at the end of a bearish trend, it is a bullish signal.

Is An Exhaustion Gap Pattern A Reversal Pattern Or A Continuation Pattern?

An exhaustion gap is a reversal pattern. It signals that the price will reverse. It is not a continuation pattern.

What Does An Exhaustion Gap Pattern Tell You?

An exhaustion gap tells a trader that a trend is coming to an end and that the market is near a market top or market bottom and that the prices will reverse.