What does a gap indicate in market trading?

A gap in market trading refers to the condition where the opening price of a security differs significantly from its previous closing price, leading to a range without any trading occurring in between. This scenario is most accurately represented by the choice that identifies opening prices that deviate from the previous day's range. A gap often indicates a shift in market sentiment or a reaction to news or events that occurred after the market closed, leading traders to adjust their positions dramatically.

This phenomenon can signal strong buying or selling interest, which can result in significant price movements. Gaps are categorized into several types—such as common gaps, breakaway gaps, exhaustion gaps, and continuation gaps—each providing insights into market dynamics and potential future movements. Understanding this concept helps traders gauge market sentiment and make informed trading decisions based on the implications of price gaps.