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Three Consecutive Gap-ups

The S&P 500 Index generated three consecutive gap-ups late last week and six positive volume days. A gap-up occurs when the intra-day high is higher than the previous day’s intra-day high. It is depicted on the charts by a space or a discontinuous space. Gap-ups are usually a bullish technical development, signaling buying pressure.


What happens after a gap-up?


It all depends on the type of gap-ups and current market conditions.


There are four different types of gaps – common, breakaway, runaway, and exhaustion gaps. Each signals various market conditions.


Common gaps are the most popular. These gaps occur under normal market conditions. As the name implies, they are common and often represented by a single gap-up.


Breakaway gaps occur when the price gaps up above pivotal resistance or gaps down below crucial support. A breakaway gap often occurs very early in a trend, signaling robust conviction in the new trend.


Runaway gaps occur when trading activities jump several price points, driven by extremely strong buying pressures. Runaway gaps are most common after a breakaway gap.


Exhaustion gaps occur during market conditions in which almost all traders and investors have already bought or sold the security. The supply and demand are typically low, and under this situation, a slightly higher or lower demand can lead to a gap-up or gap-down.


Do gaps need to be filled?


Gaps do not always get filled. It depends on different market conditions and factors. Headline news that leads to gap-ups or gap-downs can result in the filling of the gaps because of an overreaction to the news. After earnings announcements, gaps tend to be closed as well since investors and traders look beyond the good or bad headline news and search for further guidance to substantiate the move.

Gaps can also filled for technical reasons.


In general, common gaps, sometimes referred to as trading gaps, tend to be filled quickly (i.e., a couple of days).


Exhaustion gaps are almost always closed, as these gaps usually occur at the end of the trend.


Breakaway gaps tend to occur at the beginning of a move and, as such, tend not to get filled. They are often the type of gaps that traders buy aggressively.


The best breakaway gaps tend to close near the high of the daily trading range. A weak or poor close warns that the gap may be a false breakout, resulting in the filling of the gap.


Runaway gaps are also less likely to be filled since they are used to confirm the direction of the current trend.


At times, it may take months, quarters, or even years for gaps to fill.


Rather than a hard and absolute rule regarding the filling of gap-ups, it may be better to think of gaps as magnets.


Gaps can resist the pull under certain situations, but they tend to act as a pull or potential support and resistance levels to the primary trend.


Since the late-July peak at 4,607.07 (7/27/23), the primary SPX trend remains the downtrend channel, as defined by 4,125 and 4,427.


Although the three consecutive gap-ups last week (11/1, 11/2, and 11/3/23) are technically constructive, the primary downtrend remains enforced.


As mentioned, gaps can act as magnets defining support on declines and resistance on oversold rallies.


SPX is nearing another inflection point as it challenges pivotal initial resistance (1) at 4,374-4,427 (9/21/23 gap-down, Sept 2023 downtrend, Oct and Nov 2023 highs, 61.8% retracement from Jul-Oct 2023 decline, and the top of the Jul 2023 downtrend channel). Above this negates the Jul 2023 downtrend channel and signals the next sustainable bull rally.


Since the primary trend remains down, this suggests the three gap-ups from last week may act as potential support zones on pullbacks.


Initial support is 4,320-4,334 (11/3/23 gap-up) and below 4,245.5-4,268 (11/2/23 gap-up and 200-day ma), 4,195.5-4,198 (11/1/23 gap-up), and 4,104-4,125 (10/27/23 reaction low and the bottom of the Jul 2023 downtrend channel). Violation here warns of the resumption of the primary downtrend.


Source: Chart courtesy of StockCharts.com

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