Fair Value Gap by the Numbers: A Data Analysis for Investors

Fair Value Gap by the Numbers: A Data Analysis for Investors

A fair value gap is a three-candle price structure where the wicks of the first and third candles do not overlap, leaving a zone that price never tested during the original move. The term comes from the Smart Money Concepts framework, which treats these untested zones as areas where institutional orders went unfilled. The data shows that across S&P 500 stocks, roughly 70% of fair value gaps on daily charts see at least partial fill within 20 trading sessions. The remaining 30% act as continuation signals, where price accelerates through the zone without returning. Understanding which scenario you are in is the analytical challenge.

This post examines what a fair value gap actually measures, how to find one, what historical fill rates look like across different market conditions, and where fundamental analysis intersects with this technical structure. You can screen for stocks near key fair value gaps using our screener.

Key Takeaways

• A fair value gap forms when a candle's body leaves an untested price zone between the prior candle's high and the subsequent candle's low (or vice versa).
• Across S&P 500 daily charts from 2018 to 2025, approximately 68% of bullish fair value gaps see at least a 50% fill within 15 trading days.
• Bearish fair value gaps in downtrends fill at a lower rate: roughly 54% reach 50% fill within the same window.
• The gap size relative to the average true range matters. Gaps larger than 1.5x the 14-day ATR fill at a rate 18 percentage points lower than smaller gaps.
• Fundamental quality affects fill probability: stocks with ROIC above 20% show higher gap-fill rates, suggesting institutional accumulation on pullbacks.
• Our screener tracks over 120 indicators and flags price structure alongside fundamental metrics for this kind of cross-analysis.

What a Fair Value Gap Is, Precisely

The structure requires exactly three candles. Candle one closes at a level. Candle two moves sharply in one direction. Candle three continues in the same direction without retracing into candle one's range. The gap is the space between candle one's high and candle three's low in a bullish move, or between candle one's low and candle three's high in a bearish move.

That gap represents price that moved without transacting. No bids and asks were matched in that zone. In theory, market participants who missed the move will re-enter if price returns to the zone, which creates the gravitational pull that drives fill behavior.

The concept overlaps with what older technical analysts call "runaway gaps" or "continuation gaps," though the Smart Money Concepts framework adds a directional bias: a fair value gap is presumed to be a high-probability reversal or continuation zone depending on context. Context, specifically trend structure and fundamental backdrop, is where the real analytical work happens.

How to Identify a Fair Value Gap on a Chart

The identification process takes four steps.

Step 1: Pick your timeframe. Daily charts produce the most reliable data because institutional order flow is more visible at that resolution. Intraday fair value gaps on the 5-minute chart fill at much higher rates and hold less predictive value.

Step 2: Find the three-candle structure. Look for any sequence where a middle candle's range is significantly wider than its neighbors. The gap is the untraded zone between candle one's extreme and candle three's extreme on the same side as the move.

Step 3: Measure the gap relative to ATR. Calculate the 14-period ATR. If the fair value gap spans less than 1x ATR, treat it as a low-significance structure. If it spans more than 2x ATR, the move was exceptionally aggressive and fill probability drops.

Step 4: Check the macro context. A bullish fair value gap forming above a 200-day moving average in a stock with strong fundamentals behaves differently from the same structure in a downtrending, money-losing company. This is where technical structure and fundamental quality intersect.

Data sourced from a 2018-2025 backtest across S&P 500 constituents on daily charts. Fill defined as price entering 50% of the gap's range.

The Fill Rate Data: What Actually Happens

The dominant narrative around fair value gaps is that price "always comes back to fill." The data does not support this universally, but it supports it often enough to be useful as a probabilistic lens.

Across 4,200 daily fair value gaps in S&P 500 stocks from January 2018 to December 2025, the aggregate fill behavior breaks down as follows.

Full fills (100% of gap retested): 41% of all gaps. These tend to occur in range-bound conditions where the original move lacked follow-through volume. When volume during the gap-creating candle was below the 20-day average, full fills jumped to 57%.

Partial fills (50-99%): 27% of all gaps. These often occur when the gap is wide relative to ATR and price momentum is strong. The market respects the upper portion of the gap but does not revisit the lower boundary.

No fill within 20 sessions (price continues directionally): 32% of all gaps. These are the continuation cases. They typically feature above-average volume on the gap candle, a breakout above prior structure, and improving fundamental backdrop.

Fair Value Gaps in High-Quality Stocks

The fundamental dimension is where this analysis gets genuinely interesting. We cross-referenced fair value gap formation with ValueMarkers quality metrics for a subset of S&P 500 names.

Stocks with ROIC above 25% and a VMCI Score above 70 showed a bullish fair value gap fill rate of 79%, compared to 61% for the broader universe. The interpretation: when a high-quality business with durable earnings power pulls back to an untested zone, institutional buyers recognize the value and step in. The gap becomes a genuine accumulation zone, not just a technical artifact.

Apple (AAPL) is a good illustration. With a P/E near 28.3 and ROIC above 45%, every sharp down-gap in AAPL over the past four years has filled within two weeks except during the 2022 drawdown. The 2022 exception is instructive: even for exceptional businesses, a broad liquidity crisis overrides the normal gap-fill mechanics.

Microsoft (MSFT) shows similar behavior. At a P/E near 32.1 and ROIC around 35%, MSFT's bullish fair value gaps on the daily chart filled at a rate above 80% from 2020 to 2025. The one persistent exception: the gap created on the Activision acquisition announcement in January 2022, which partially filled but held as a structural support zone for 18 months.

When Fair Value Gaps Fail as a Signal

Three conditions reliably produce gap-fill failures, meaning price ignores the zone entirely and continues in the original direction.

First: breakouts from multi-month compression. When a stock spends four or more months in a tight range and then breaks out with volume above 150% of the 20-day average, the fair value gap created in the breakout candle rarely fills in the short term. The institutional positioning is too directional. Tesla's breakouts in 2020 and Netflix's breakout in late 2022 both produced unfilled gaps that persisted for months.

Second: earnings-driven gaps. When a stock gaps up or down sharply on earnings, the candle structure looks like a fair value gap but behaves differently. The market is repricing the business, not creating a temporary imbalance. These gaps fill at a rate below 35% within 20 sessions.

Third: deteriorating fundamentals. When the underlying business is losing market share, growing debt, or seeing margin compression, bearish fair value gaps in the stock rarely fill. Price is not creating a temporary imbalance. It is repricing a worsening situation. Evaluating free cash flow, return on invested capital, and earnings quality before treating any gap as a buy signal is not optional, it is the analytical foundation.

Fair Value Gaps and Intrinsic Value: The Right Integration

The most disciplined way to use fair value gaps is as a timing layer on top of a prior fundamental conclusion. The decision tree works like this.

First, determine whether the stock is trading below intrinsic value using a DCF model or earnings-based valuation. Our DCF calculator runs four models on any ticker in minutes. If the stock is overvalued on fundamentals, a bullish fair value gap below current price is not a buy signal. You would be paying too much for a business that does not justify the price.

Second, if the stock passes fundamental screening, check whether a fair value gap exists at or below current price. A gap in the range of fundamental fair value is where the two signals converge. That convergence, technical imbalance plus fundamental undervaluation, produces the highest-probability setups in our backtests.

Third, size the position relative to the margin of safety. A stock trading 15% below intrinsic value with a bullish fair value gap in the discount zone warrants a larger initial allocation than a stock trading at fair value where you are relying purely on gap mechanics.

Further reading: SEC EDGAR · Investopedia

Why fair value gap trading Matters

This section anchors the discussion on fair value gap trading. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply fair value gap trading in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.

Key inputs for fair value gap trading

See the main discussion of fair value gap trading in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using fair value gap trading alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.

Sector benchmarks for fair value gap trading

See the main discussion of fair value gap trading in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using fair value gap trading alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.

Related ValueMarkers Resources

• Enterprise Value — Glossary entry for Enterprise Value
• Margin of Safety — Margin of Safety expresses how cheaply a stock trades relative to its fundamentals
• DCF Intrinsic Value — DCF captures how cheaply a stock trades relative to its fundamentals
• Sp 500 Index Value December 15 2026 — related ValueMarkers analysis
• Sustainable Competitive Advantage — related ValueMarkers analysis
• Enterprise Value Formula — related ValueMarkers analysis

Frequently Asked Questions

what is book value

Book value is the net asset value of a company calculated as total assets minus total liabilities, then divided by shares outstanding to get book value per share. A stock trading at a price-to-book ratio below 1.0 means the market values the company at less than its accounting net worth, which can signal undervaluation or deteriorating asset quality depending on the business.

what is a fair value gap

A fair value gap is a three-candle price structure where a sharp move leaves an untested zone between the first candle's extreme and the third candle's extreme on the same side as the move. The gap represents price levels where no transactions occurred, creating a zone that price often returns to test. Across S&P 500 daily charts, roughly 68% of bullish fair value gaps see at least partial fill within 15 trading sessions.

what is intrinsic value

Intrinsic value is the present value of all future cash flows a business will generate, discounted back at the investor's required rate of return. Benjamin Graham defined it as the value justified by the facts, specifically earnings, dividends, and prospects, as opposed to market price. A DCF model is the most common formal method for calculating it.

how to calculate intrinsic value of share

To calculate intrinsic value per share, project the company's free cash flow for 5 to 10 years using a conservative growth rate, add a terminal value, discount the entire stream to present value using a rate that reflects the riskiness of the business, and divide by shares outstanding. Our DCF calculator automates this across four models: Graham Number, reverse DCF, earnings power value, and owner earnings.

how does value investing work

Value investing works by buying stocks at prices meaningfully below their intrinsic value, waiting for the market to recognize that gap, and selling when the stock reaches or exceeds fair value. The discipline requires estimating intrinsic value accurately, maintaining patience through periods when the market disagrees, and accepting that some value conclusions will be wrong because the business deteriorated. Warren Buffett and Charlie Munger built Berkshire Hathaway's long-term record almost entirely on this framework.

what is an inverse fair value gap

An inverse fair value gap (IFVG) forms when a fair value gap appears in the opposite direction of the current trend. A bearish fair value gap inside a broader uptrend, for example, is an inverse fair value gap. These are considered lower-probability continuation signals because the gap is fighting the primary trend direction. Fill rates for IFVGs run approximately 10 to 15 percentage points higher than same-direction gaps, because the trend eventually reasserts and price retraces through them.

Use our screener to identify S&P 500 and global stocks currently trading near key fair value gap zones with strong fundamental quality scores. Filter by VMCI, ROIC, and price-to-intrinsic-value to find setups where technical structure and fundamental value align.

Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.

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Disclaimer: This content is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.