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'Mind the Gap' and Belwethers

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Since I'm toiling away in London for 3 weeks, I see and hear again the 'mind the gap' messages found in some London Underground stations. The meaning of those announcements is to watch for those open spaces that sometimes exist between the subway car and the platform; 'watch your step' is what you'd hear in the U.S.

Just as holes or 'gaps' are something you need to be aware of underfoot, so to is the space or gaps that sometimes occur between prices of stocks or stock indexes from one day to the next, which then form chart 'gaps' in technical analysis terms.

Stock or index price 'gaps' occur on overnight news or news occurring before the opening of the two major U.S. stock exchanges, the NYSE and Nasdaq. Such news can be specific to a stock or sector and can cause a select stock(s) or sector to fall or rise sharply on the market opening OR the news can be general and cause the entire market to 'gap' up or down if it occurred outside market hours; imagine "Fed lowers interest rates in a surprise weekend move".

A funny thing is that while you see price gaps that occur on daily chart graphs in STOCKS, you also ONLY see them appear on daily charts of the Nasdaq indices; e.g., the Nas Composite (COMP) or Nas 100 (NDX) Index. Why no daily chart 'gaps' in the S&P or Dow?

For the reason that if there are delayed openings in NYSE stocks due to order imbalances, those averages and Indexes will 'assume' an 'Open' that is equal to the prior night's Close and hence the index, not the stocks themselves, will show an opening that is in the SAME area as the prior day's close.

This way of calculating NYSE stock prices means that we have to go to hourly charts of the S&P and Dow to see where the chart gaps exist; S&P and Dow chart gaps will usually, I could almost say always, occur on the same dates when we see COMP or NDX daily chart gaps.

The implication and significance of chart GAPS?

These chart formations are worth noting because often, later on, overhead gaps tend to 'act as' areas of resistance and gaps below current prices tend to act as areas of support and areas of buying interest. My first chart will have an example of what appears to be overhead resistance coming in at a gap that is above the market.

Chart/price gaps happen when a stock or index Opens substantially higher than the prior day's high and climbs from there; e.g., due to a stock offer or buy out announcement such as occurred with Yahoo (YHOO) in late-January. Or, when prices open substantially lower than the prior day's low and fall from there, as can happen on earnings reports perceived as negative; e.g., GE stock 3 weeks ago.

Moreover, I'll show charts of some key stocks, as well as market sector indexes like semiconductors, energy, etc that can be big market influencers, sometimes tracing out a breakout, breakdown or stall AHEAD of the overall market; a term for such market influencers is 'bellwethers'. A good market predictor or bellwether can also be another stock index, often a less followed; e.g., the NYSE Composite Index (NYA) or the Dow Transports (TRAN).

MIND THE GAP!
The Nasdaq 100 Index (NDX) reversed yesterday and came roaring back today, after climbing into a prior 'gap' area for prices, stemming from the Jan 3rd NDX low being 2040 and followed by the next day's (1/4) HIGH being substantially lower at 2025. This created a 'gap' or non-trading space on the chart of 15 points, beginning at 2025, extending to 2040. To say a chart gap gets filled in means in this example that sellers finally got a chance to sell at all prices between 2025 and 2040 and the daily bar that day covers that formerly unfilled price area. Chart gaps, until filled in, are price zones where no buying or selling occurred when the gap was created.

In the case of the Jan 3-4 price gap, sellers might have wished to sell more in the 2040 area and cut their losses in a better fashion. Potential sellers get their chance to do so again when NDX comes back into its prior 'gap' area such as is happening currently per the chart below.

The price area of the downside prior 'gap', besides having a beginning of the sharp early-January market break (and start of a new down leg), is also an area of potential resistance implied by a fibonacci 62% retracement out to 2/3rds (66%) of the late-October to mid-March decline. Interesting how the market, when hitting this level yesterday in NDX, sort of ran into a brick wall. The index came strongly back today; we'll see what comes tomorrow. The market is getting more volatile as these prior areas of turbulence are hit again.

No doubt the chart gap shown on the NDX daily chart above seems minuscule, but gaps can be quite sizable in terms of the price range of prior weeks and months; an example of a stock that gets hit with some adverse news (disappointing earnings) is seen graphically below in the case of General Electric (GE). GE fell from just over 36 to a high of 33 the next day. The resulting downside chart gap area extending from 36.16 down to 33 can now be seen as a 3-point band of potential resistance or scale up selling interest.

GE is also a 'bellwether' stock, one that has been over many years, a good predictor-type stock, just as IBM was once also (much less so today). There's an instance shown in the GE daily chart above where the stock breaks above a well-defined down trendline AHEAD of the overall market, making GE a useful bellwether stock to chart for clues as to what trend shifts might lie ahead for the S&P or Dow. An example of this was seen when the GE pierced its down trendline on 3/17 and rallied sharply as highlighted on the chart above.

In the S&P 500 (SPX) daily chart below, we see that the same upside penetration of ITS down trendline didn't occur until 4/1. GE 'led' the market in its bullish breakout chart pattern. It matters less that the stock fell sharply (4/14) on a quarterly earnings report that was significantly under market expectations, as this news was specific to the stock and not generally related to the market. However, we could also wonder how long the S&P is going to continue to climb without also having much participation by bellwether GE.

While Yahoo (YHOO) is not considered a true bellwether Nasdaq stock (unlike Cisco: CSCO) it's an important one and the next chart below highlights the tendency for its prior upside chart gap to also highlight what is an area of 'scale down' buying interest into the YHOO gap area. Of course a stock in play tends to remain in play often, as reinforced by Carl Icahn's interest that has surfaced in the company, if only to force a sale.

So far at least, YHOO has only 'filled in' about half of its prior gap and the stock was up again today. As to whether all of this gap gets filled in by a decline all the way back to the $21 area or if dips toward levels above that continue to find willing buyers. By the way, that used to be a good rule of thumb on price gaps, especially sizable ones, try and buy at half-way back (or better) into the gap.

We often find that prior upside gaps get about half filled in or 100% filled in, followed by a tendency to rally; the same with upside price gaps when they act as resistance, even if only initially. Since we don't know if a rally will 'fail' in a gap area either temporarily or for some time to come, it's a good idea to take account of them (to 'mind the gap') and be sharp in assessing further price action to protect any existing positions or to not blunder into an ill-advised new position.

As I noted about my writing reflecting a local time that is 5 hours ahead of New York, my charts reflect a closing date of today, but only because I'm writing after 10 pm. Today, NDX (first chart) rallied back to an intraday high and a close today that puts it solidly back into its 2025-2040 gap. Acts like a bull market, talks like a bear. Stay tuned on the battle between the bulls and bears!

As anyone following the sector indices knows, oil/energy stocks have been the bright or 'sweet' spot in the overall market, as is seen in the very strong multiyear advance being made in the CBOE Oil Index (OIX). A steep bullish uptrend line is highlighted below in the weekly OIX chart and oils have been a key factor driving the S&P and the NYSE Composite Index (NYA) back up from the mid-March lows. The index has recently hit the top end of what may be some upper channel resistance as noted at the red down arrow. Either OIX pulls back from recent highs; or, in a contrarian view, breaks out to the upside and has another spurt higher, such as to the 1000 area.

The bellwether OIX sector index weekly channel interpretation I've drawn below would suggest that recent market highs could be at a key juncture, possibly meeting rising resistance. If any such technical resistance doesn't materialize and if there's renewed buying interest, I'd assume that there was going to be a final spurt before prices turn lower; a countertrend decline is overdue. It doesn't mean it comes tomorrow, only that we shouldn't be surprised if something occurs sometime soon that brings down oil prices.

A bellwether tech sector index has historically been the Philly Semiconductor Index (SOX) group of stocks. Strength in the semiconductor/chip stocks has been important for the staying power of rallies in the overall Nasdaq Composite or Nasdaq 100 indexes. It's a 'bellwether'!

Quite different than the significance of the very bullish oils (OIX) influence in the continued S&P recovery, the Semiconductor Index (SOX) had until today only made a 38% first-stage recovery retracement of the July to mid-March decline, as highlighted in the daily SOX chart below. Today, for the first time, a strong rally carried SOX decisively above the 38% retracement level, and sets up a target for the NEXT important fibonacci retracement of one-half or 50% of the prior move; i.e., to the 440 area.

The New York Stock Exchange Composite Index (NYA) has led the S&P and Dow higher in some past years and during those periods there was a persistent and broad-based rally going on; only in terms of the Dow or S&P it didn't seem like much of a bull market. You saw it in the broadest NYSE index, the NYA, making it a plus to keep an eye on this index for its bellwether function. Sometimes resistance or support is more obviously seen in NYA, or a breakout or reversal indication not obvious in the other indexes.

Currently, as seen in daily NYA chart below, today's rally pierced its down trendline decisively as part of a rally to a new high for the move. This price action sets up a bullish potential objective to the retracement levels of importance at 9608 to 9693. As the index so easily pierced its prior highs and down trendline and kept going today, a next objective could be 9600-9608 easily, with potential up to the 9690-9700 area.

The 13-day RSI is not following prices to a new closing high, giving a small divergent note to today's renewed rally. It may be NYA gets to near 9700 and a significant top made there.

My crystal ball is getting cloudy as it nears midnight in London. Time to write the last words:
GOOD TRADING SUCCESS!

QUESTIONS/COMMENTS:
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