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Tuesday, August 20, 2013

Breakaway Gap?

There is a common misconception out there that, “gaps are always filled”. We’ve all heard that one right? But the thing is, that there are all different kinds of gaps that all have different implications. Exhaustion Gaps for example are always filled, by definition. They show up at the end of a move, uptrend or downtrend, and then quickly reverse. It was given that name because the market’s move by that point is, “exhausted”. ButBreakaway Gaps aren’t filled for a long time, if ever. They show up to begin a big move. One day the market gaps higher (or lower in a new downtrend) and doesn’t look back. Some might call it a “gap and go”.

Take a look at all of these gap and go’s in the stock market during this uptrend. Nice moves followed those gaps. But this is now the second consecutive time that we’ve seen one to the downside. So if this is indeed a breakaway gap, the implications could be devastating for this market.

We at least know this isn’t an exhaustion gap….

8-19-13 spy gaps

Look at the uptrend line from the November lows. These recent gaps lower came at or around that trendline. So we know the market is recognizing the significance of this well-defined uptrend. Now we’re back below it, after gapping lower.  This critical break also comes right at the horizontal support we’ve been talking about, that represents the May closing highs.

Breakaway gap or not, this is an important series of events that has occurred over the last week. To invalidate the consequences of this potential breakaway gap, S&Ps quickly need to be fill it and the May highs need to be retaken by the bulls.

The Japanese call gaps, “windows”. And when they’re filled, they say the market is “closing the window”. So with that in mind, I think the bulls’ window of opportunity could be closing as we speak.

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