Chartered Market Technician (CMT) Practice Exam

The significance of the Exhaustion Gap in technical analysis primarily relates to its indication of a potential trend reversal due to overextension. An Exhaustion Gap typically appears after a strong price movement and signals that the prevailing trend may be losing momentum. This gap occurs when price jumps significantly, often leading to a brief continuation of the trend before a reversal takes place.

When traders observe an Exhaustion Gap, it often suggests that the buying or selling pressure has peaked, leading to exhaustion among traders who were pushing the price in a particular direction. This phenomenon can occur in both bullish and bearish trends. As a result, the market is more susceptible to a reversal as new participants may become cautious or even start to take profits, while those who are still in the market might begin to change their positions.

The concept behind an Exhaustion Gap is rooted in the psychology of market participants. After a significant price movement, the balance of supply and demand can shift, leading to increased selling pressure or reduced buying enthusiasm, prompting traders to reassess their positions. This shift is important for analysts and traders looking to identify possible turning points in the market that can signify a change in trend direction.