Chartered Market Technician (CMT) Practice Exam

A breakaway gap is significant because it typically forms at a crucial price level, either support or resistance, indicating a strong shift in market sentiment and momentum. When prices surpass a resistance level or drop below a support level, the gap reflects the market's decisive rejection of the previous trading range. This often occurs after a period of consolidation and can lead to increased volatility as traders react to the new price information.

Breakaway gaps can signal the beginning of a new trend, as they suggest that many traders are willing to enter positions at these newly established levels rather than waiting for a return to the prior range. The presence of a breakaway gap often reassures traders that the momentum behind the move is strong enough to carry prices in the desired direction, further reinforcing the support or resistance levels that were just breached.

In contrast, other types of gaps like exhaustion gaps indicate the end of a trend, runaway gaps signal momentum continuation within an existing trend, and common gaps signify normal price variations that do not hold significant meaning in terms of market sentiment or trend changes.