I presented a bit of research a while ago that suggested the old adage “gaps must be filled” is a reasonably reoccurring pattern. I’d encourage readers to read this blog if they would like a primer on understanding gaps, and for some analysis on how often gaps occurring on daily charts are filled.
The daily candlestick chart below gives you a recent history of the S&P500 and the price gaps it has experienced since last December. You’ll note that the gaps I’ve highlighted on the chart have indeed been filled. Recall that “filling a gap” simply means that the market moves back to take out the excess movement the gap represented. Again, I strongly recommend you read the blog noted above, and I might even be so bold as to suggest you read the section within my book Sideways that covers the subject. The book also covers “turnaround” candlesticks, which I’ve noted on the chart. Such candlesticks enhance the potential for a gap to be filled.
The S&P 500 gapped up as it hit its all-time high price point on Friday of last week. Immediately following Fridays gap up, yesterday (Monday June 20) saw a pullback from the high. Will this be the beginning of a retracement back to the early price point of last week – i.e. will the gap be filled? My guess is yes, it will be. Momentum indicators (RSI and stochastics – not shown on this chart) are overbought. The price action that fills gaps need not be immediate, so you might have to wait a few days before the retracement is complete. Were the S&P500 to illustrate a turning point candlestick as noted on a couple of the gaps in this chart – that would strengthen the case for a bigger pullback than just the filling of the gap.
Introducing business students to Technical Analysis
I’m off to speak to Georgian College business students today to de-program their minds on the buy and hold / can’t time the market myths. I’ll be lecturing on the basics of Technical Analysis.
Do you know of a student taking business, finance or commerce in college or university in Ontario? Forward this blog to them and encourage them to pass it along to a teacher or professor at their school. I welcome the opportunity to introduce these students to Technical Analysis. I have done guest lectures for Georgian College, Laurentian University and Ryerson University in the past, and I’m only too happy to do more of this type of work in the future – at no cost to the school, of course.