This column was originally published on RealMoney on Aug. 25 at 2:06 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

It looks like the

S&P 500

has one goal right now: filling the gap formed July 7, the date of the London bombings. The pull exerted by that gap could drag the index down to a level where bulls capitulate -- and create a bottom. I'm leaning to the long side already, but seeing that type of action would make me a buyer.

The July 7 Gap

Recall that back on July 7, the market collapsed in overnight trading in response to the grim news out of London. That created the potential for a huge gap down once prices opened. However, most of the damage in the futures market was done within minutes of the news.

We saw a bottom around 5:30 a.m. EDT as the futures tanked to the 1167.00 level. But that is as low as the futures went. Within an hour, the S&P began to lift off that level. By the time the cash markets opened for trading, order had been restored. The selloff at the 9:30 a.m. EDT opening was relatively tame, compared with the initial meltdown.

The S&P bottomed in the trading session at 1186.50. That was also the opening of the day session, so it marked the bottom of that day's sizable gap. The close of the previous day was 1198.60; that meant the gap carried about 12 points. Like most gaps we see these days, it didn't take long to fill. Since the filling of the gap on that infamous day, the market hasn't returned to that level.

Fast forward to the present, and it looks like the market has just one thing in its sights: not oil, not interest rates, not even the dollar, but the gap from July 7.

Since that date -- really, since the market bottomed on Globex early that morning -- the market moved pretty much straight up, until it topped in late July. In the S&P futures, this marked a spectacular run of better than 80 points (including the July 7 Globex lows) in just a few weeks. At the early August highs, bears had become an endangered species. Bulls had pretty much taken over, and factors such as higher interest rates, record highs in oil and the housing bubble didn't seem to matter.

Where We're Being Pulled

But in early August, the market began to act differently. It began leaving more and more upside gaps, filling most but leaving some behind, such as the Aug. 16 gap at 1237.50. It started filling downside gaps, some that had been left behind weeks before, such as the July 11 gap.

Of course, it's the nature of gaps to get filled, especially those in the S&P futures. But the ones that draw the market's attention at any given moment are important tells about where the market is headed next.

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Right now, there is no (nearby) downside gap remaining in the S&P other than the island reversal gap highlighted below. And for that matter, if you include the July 7 Globex session, that gap was actually filled. The only other remaining downside gap -- the tiny July 11 gap that I have talked about for weeks as a potential downside objective -- was filled this past Tuesday. So at this stage, there is no downside gap in the S&P drawing prices lower.

But there is still the sharp rally off the July 7 lows, which clearly is being retraced. How much of it must be retraced to make an impression on all those bulls? Well, how about to the top of July 7's gap? That suggests a pullback to 1198.60, the July 6 close, to really make a clean sweep of this.

September S&P Futures
Heading for the scene of a real crime

Source: REFCO Private Client Group

Wouldn't that be sufficient to get those bulls worked up? Think of all the stops that must be piled up just below that level. Everyone who has shown a profit since the launch began is probably watching that level, just below 1200, as maximum risk or break-even, or the spot to cut and run. Anyway, it's a big number, and ultimately it probably has to come out.

That's not to say that the S&P must retrace its entire rally off the July 7 intraday lows. But somewhere in there, probably just below the top of that day's gap, somewhere south of the 1199-1200 level, there is a spot that will cause lots of bulls to throw in the towel, and that's a pretty good spot for this retracement to find a bottom and for the market to turn back up (once again with relatively few on board to benefit from the ensuing rally).

Confirming Factors

There are other reasons to suspect that the current pattern isn't quite complete. For one, the

Nasdaq

has some unfinished business on the downside. This is true for the Nasdaq 100 as well. Lately, for a change, the NDX seems to have been calling the shots somewhat, so we'll look at its chart.

Nasdaq 100 Cash
Working on Its July 13 Gap

Source: REFCO Private Client Group

Last week, for four consecutive days, the NDX found support just above its July 19 gap at the 1570 level. Earlier this week, that gap at 1570 was filled. But it still had some influence, seen as the NDX refused to close below 1570 on Monday and Tuesday even though it broke below 1567 both days on an intraday basis.

Wednesday, that level was snapped. In the process, the NDX pulled back into its next downside gap from the close of July 13 (which should be labeled the July 14 gap, but you get the idea). Assuming this gets filled, there is another gap to be filled not too far below, from the close of July 8 at the 1533 level. That's not really out of the question, though it'll take some work to get there. If that July 8 gap gets filled, you can bet the S&P has pulled back into its July 7 gap below the 1198.60 level. Just for the record, there is another downside gap in the NDX below this one, a tiny gap from way back on May 13 at the 1455 level. But I suspect the market isn't headed there anytime soon.

Meanwhile, the Nasdaq Composite has a nearby downside gap, also from the close of July 8 at the 2113 level. Wednesday's downside reversal brought the Nazz within striking distance of this gap, so it would be a surprise if this gap were not filled in its entirety. Not that it must happen right now, but odds are better than good that it will happen. When it does, I'll probably be buying for the obligatory bounce.

Speaking of buying for the bounces, that's what I have been doing lately on a limited basis. I'm likely to continue trading from the long side until it looks like the current weakness is something more serious than just a needed retracement of an overdone, overblown rally. While I cannot be certain that the July 7 gap in the S&P will be revisited over the very near term, one thing I know for sure: If and when it gets there, I am a buyer.

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At the time of publication, Schiller was long S&P funds and NDX funds, and short Nasdaq 100 Unit Trust puts, although holdings can change at any time.

Dr. Harry Schiller is owner and editor of the Short-Term Consensus Hotline. He is a stockbroker and Options Principal with brokersXpress, inc. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he appreciates your feedback;

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