Mind the gap!

November 16, 20208 Comments

Gaps are a sign of excess. They are formed between two bars on a chart – represented by a space between the close of one bar (daily or weekly) and the open of the other bar. Gaps occur because investors are so excited (positive) that they bid prices higher than yesterday’s close right from the get-go. Or, they form when investors are so utterly fearful that they sell despondently from the start of the trading day. They just don’t care what price they have to sell at – hence the gap between the two days.

In looking at the various world markets charts, I have noted a highly unusual number of gap-ups on these indices. Incredible to see so many indices across the world bidding up so quickly – all at the same time –  to form gaps. Gaps tend to form, as noted above, when investors are hyper bullish (gap-ups) or hyper bearish (gap downs). In this case, we are looking at gap-ups, a sign of exuberance.

Gap-ups can actually be a bullish sign. They can indicate a break-away from an area of congestion. However…As a contrarian investor, any hyper bullish attitude by investors tends to concern me. Especially when its so widespread. A gap is often “filled” when the market re-evaluates its excessive bullishness or bearishness. When market players feel the stock or stock market index has moved a bit hastily (to the bullish or bearish side), traders often swoop in and buy into the selloff , or sell into the euphoria. This “fills the gap”.

8 Comments

  • These gaps are even more impressive because they are on weekly charts. I won’t say that gaps on weekly charts are rare but they are certainly far less frequent that on daily charts.

    Reply
  • Hi Keith,

    Are you aware about ETF, SP 500 Value in Canadian dollar. like match SPYV. I could not find it.

    Thank you

    Reply
  • Hi Keith,
    I know you like to follow what the charts tells us but do you have a feeling what the percentage of this near term pullback would be? In additional, can you comment on the support level for the Dow and S&P?
    Thank you for your time.

    Joyce

    Reply
    • Joyce–As noted, I think any pullback will be small. SPX support is near 3500, which is less than 5%. That’s likely the situation across the board -ie less than 5% downside for most markets. Breakouts are bullish for markets, and that’s what we’ve seen – I used yesterdays small pullback to buy a tiny bit more. We are down to 15% cash in the equity model–yes, we think there is room to pull back–but again, not likely very big downside. Our view is that dips should be bought. We are focused on specific stocks we like and where we’d like to pick them up, rather than a carte-blanc macro view of a big pullback.

      Reply
  • Keith – could you please update us on your view of oil and energy? They seem to have bottomed right around the elections and most energy names are up +50% or more. It seems longer termed charts show more upside (i.e. bottom is in) but now technically speaking, where does one get in after missing this already whopping rally? Thanks much.

    Reply
    • We’ve bought a bit into this rally. There are always points of pullbacks to buy more. Decide on the % of your portfolio you want in oil–lets say 6% (just as an example). You can leg in with 2% over 3 different points–say 2% now, 2% in the end of the month, and 2% by say end December–you can use that last leg as an opportunistic play, waiting for a pullback if any.

      Reply

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