The S&P 500 is on the verge of closing the last open gap down on August 1. Now there are four gaps up that beg to be filled.
Gaps are Like Magnets
I have commented on this before but it’s worth repeating. Gaps are like magnets and nearly all of them close sooner or later, typically sooner.
A down gap occur when the market opens lower than the lowest point of the previous day and stays lower. An upward gap occurs when the market opens higher than the high of the previous day and stays there.
At the end of October there were two open gaps higher and one lower. The gaps higher are now closed or partially closed.
Anyone who shorted the S&P 500 breakdown in August and held, just lost all their gains back. That gap did not completely close yet, but it partially filled with another 10 points to go.
The powerful rally that started at the end of October left three stacked gaps and there is still one more from March. The unfinished business is now all to the downside, assuming the remaining 10 points fill or the gap gods are satisfied with a partial fill.
Four Stacked Nasdaq Gaps
The Nasdaq is in the same setup. There are four stacked gaps lower. I expect all of these gaps will close next year.
If you are thinking about joining this rally now, I suspect it is nearly over. Even if there is still more to come, buying over four stacked gaps is begging for trouble.
Mish – thanks for the reminder on the gaps. It is Rat-speak that I remember and appreciate having benefitted from Dave Gordon’s patient and informative posting in 2000 and beyond. Some others may not have experienced it. I don’t know much, but Rat’s lessons stuck.
Yes – I had Trenchrat in mind when I made that post.
He would not buy any stock with multiple stacked gaps.
For your Nasdaq commentary it is four stacked gaps up, not down. Presumably you would expect those gaps up to be closed.
yes
Yes but I never said there were gaps down. I said the gaps were “lower” and they are.
Time to load the boat with “cheep” stocs.
What could possibly go wrong?
FOMO
A series of large gap-ups in the market indexes like this, haven’t occurred in recent memory. On the other side, are matching gap-downs on yields of 10-year Treasuries, on the same day of the gaps in equities. If this were corporate investors selling bonds to buy indexes, then yields would gap-up. (This is the fear of China dumping U.S. Treasuries). Some well funded entities are buying equity indexes and 10-year Treasuries, in large quantities, on the same day. The remainder of the market rally are momentum buyers and short covering.
In October 2022, Janet Yellen expressed there was no liquidity in the Treasury market. Long yields were 4 percent and inflation was rising. Yellen complained, because she needed to fund $3T in Biden’s spending bills. She did not want yields to rise, locking-in higher rates to service Biden’s new debt. By magic, long Treasury rates stagnated while the Fed raised FFR to their 50-year average. 9 months later 10-year rates began to rise, nearing their 50-year average. If in 2022, Yellen issued $120B a month in new debt (same rate as the Fed’s QE in 2019), she would be only half way to fund Bidenomics.
Last week’s business news noted the lack of foreign buyers of U.S. Treasuries. So they are not pushing down 10-year yields. The Treasury and the Fed are the remaining culprits.
It’s not a good sign. Escalator down elevator up. The gaps left from internet bubble low to housing bubble high took 7 years to fill, 2018 to 2020 high took 2 years. 7 year debt cycles 1987, 1994, 2001, 2008, 2015, 2022, 2029. IWM does not like gaps in the chart, watching that one close. Lots of gaps were left to the highs before covid was released. The high was a critical “news” target. Insiders were out, gaps were filled, and they loaded up before the announcement, not small trades, catching falling knives with millions.
The monthly candles were a fraction of a size they are now after covid. Expected ranges are being blown out by more than double. The $IMX retail trader investment movement index is up from the lows but the reading for the four-week period ending October 27, 2023 ranks “moderate low” compared to historic averages. 2021 high was 9.08 now at 5.64, maybe they are looking for some more bag holders.
Not just gaps but weekly volume imbalances, where there is a gap between candle bodies on the weekly chart. Those like to fill in like a paint roller. They front ran those so unfinished business below. See what the beginning of 2024 looks like. After 2008 they used qe for themselves. It was supposed to be for emergency purposes with punishments. They punished Bear and Lehman for not going along with the Fed IMF 1997 Asian banking crisis bankrupting and taking over the Asian banks.
Such gaps are like weather min/max temperature records.
Eventually they fill in.
It doesn’t mean anything, it has no significance.
I prefer tea leaves.
For important work I sacrifice a chicken.
I sacrifice a pure white rooster and have an expert read its entrails before making a buy or sell decision. It works better than broker advice.
As a vegetarian, I use pumpkins.
That a stock has to fill a gap or not depends entirely on the stock and not on the chart. There are lots of growth stocks that have left gaps way below that will never be filled and there are lots of tired stocks that have left breakdown gaps that will never be filled.
I don’t understand why gaps must be closed. In theory there is a gap every day because the markets are only open for part of the day, but the world is open 24/7.
Nature abhors a vacuum?
🙂
Gaps are market inefficiency. Another gap not mentioned here is the fair value gap. If price moves quickly in one direction, such that the pins of the first and third candles in a group of three, do not touch the same price, there is a gap in fair value, as price was not tested. Later, price tends to return to that level. Stock trader David Frost, on his daily Youtube videos repeatedly says that “the market loves to come back to test breakup and breakdown candles.” Those have a fair value gap to fill, eventually. Part of the mechanics of the market.
SPX 1D resistance line : Jan 4 2022 to July 27 2023 highs.
So far (since the summer rotation), stocks have tracked the seasonal pattern.
There are 6 seasonal, endogenous, economic inflection points each year.
(they may vary a little from year to year):
Pivot ↓ #1 3rd week in Jan.
Pivot ↑ #2 mid Mar.
Pivot ↓ #3 May 5,
Pivot ↑ #4 mid Jun.
Pivot ↓ #5 July 21,
Pivot ↑ #6 2-3 week in Oct.
Any thoughts on why these points may exist?
I can infer 1 and 6 based on general consumer habits (i.e. purchasing gifts this time of year, then hibernating in Jan), 3 follows the saying “sell in May and go away”, longstanding conventional wisdom that in a broad sense there is less growth in the summer. I suppose there is a little seasonal buying/enthusiasm when winter turns to spring that could explain 2, but if there is any consistent correlation to directional moves 4 and 5 a possible cause eludes me.
They are driven by liquidity (expanding and contracting reserves).
Speaking of gaps, gold has some gaps to close at $1820-30.
I understand the mechanics of why a NYSE stock specialist must close a gap. I was debating whether an index fund behaved the same.
great point.
That’s great but where was this analysis when those 2 down gaps opened up? All I remember is how the late summer crash was a continuation of a multi year bear market and no warning at all that the gap at 4560 would fill sooner rather than later.
I missed this upswing but I am not going to chase it.
Don’t.
Thanks for the technical analysis Mish. I like when you have a chance to focus on markets.
Volatility is something I try to take advantage of. I continue to buy dips and sell rips. Which has been working out well for the last few years.
However, I tend to get nervous as markets keep climbing and I begin to raise my cash position. Currently 22% and nearing my typical 25% upper end target. Occasionally, when very nervous, I have increased my cash to as high as 75% (I have done this only a few times in my investing life).
At this point I am considering exceeding my typical 25% upper limit. Though, I can’t say how far above it I will go. That depends on how nervous I get.
Thanks for the great blog.
TINA2FOMO