Mind the Gap, It Closed Bearishly On Wednesday

Mish

The gap down on Monday filled on Wednesday, then stocks sank into the close. This was a very bearish event.

What is a Gap?

  • A gap up occurs when the market or an individual issue opens higher than the high on the previous day.
  • A gap down occurs when the market or an individual issue opens lower than the low on the previous day.

Sunday, January 26, I commented US Futures Poised to Gap Down on Coronavirus Scare: What Then?

Here is the chart I posted.

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Sunday Evening Mish Recap

In this case, S&P 500 futures are at 3257 with the low on Friday at 3281.53.

The close on Friday was 3295.47, but that is irrelevant. This gap down, assuming there is one, will close at any time in the future when the S&P 500 trades at or above 3281.53.

Gaps Act Like Magnets

I am a firm believer that Gaps fill sooner or later but typically sooner.

However, gaps can take days, weeks, months or even years to fill.

All the while, they act like magnets.

Best Bear Case

The best bear case is if this gap down fills quickly then the market collapses as soon as it does.

Mind the Gap

Until a convincing new stock market high is in place and back tested we are at a potential market top.

Yes, one could make similar comments at any time.

But from a trading observation, one has a relatively low-risk stop out point when placing a trade.

Gap Magnets

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I now expect those gaps to close sooner rather than later.

Those wishing to play the long side can think about a buy order in that lower gap with a convenient stop close by.

Mike "Mish" Shedlock

Comments (4)
No. 1-2
ksdude69
ksdude69

Ive watched long term gaps fill. Stocks are gasping for air up here. Charts look toppy to me.

Carl_R
Carl_R

I agree 100% with your comments here. If you want to add psychology, the gap down was panic. The fill was people thinking that the numbers are small, especially in the US, and that people are over-reacting. The renewal of the downtrend is a slow realization that it might actually be a big problem, after all, and that, the more they look, the more they realize that there is a difference between what they see and what is being reported.

FWIW, the RUT is now negative for the year, and the SPX and DJIA are threatening to go negative. DJTA is also down, but DJUA is up quite a bit, and unaffected by recent events.


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