July 26, 2016
By Mish Schneider
It was the best runaway gap, it was the worst runaway gap. Ok, maybe a literary stretch, I nonetheless want to highlight the difference between a runaway gap (also known as a measuring gap) with follow through versus one without.
On the lefthand side is a daily chart of the Dow Jones Industrial Average (DIA). On July 14th, the DIA gapped higher. What made that gap significant is that it was a gap to new all-time highs. That makes it a runaway gap by definition.
As the name implies, the price has literally run away into new chart territory. That pattern is extremely bullish when it confirms as this did. The gap lasted for days.
On the righthand side is a daily chart of Semiconductors (SMH). On July 18th, it too had a runaway gap to new all-time highs. It confirmed and held for five days.
One failed and one ran up further. What does that mean for the market?
While we wait for some big names to report earnings and the Federal Reserve Minutes to come out, examining the dichotomy between the two charts keeps us forewarned and forearmed.
Statistically, performance on a runaway gap improves 2/3 of the time. Nothing is perfect. However, since runaway gaps are typically not filled for a considerable amount of time, that DIA’s was filled has some meaning but not necessarily an ominous one.
When an insturment experiences a runaway gap it implies that the current trend will continue. With the increase in interest, traders who have been sidelined waiting for entry are now jumping in for fear of missing out.
If the gap gets filled, it means that perhaps the trend is weakening. Also possible, some gap theorists say that the high of the day before an instrument gapped up or the low of the day the instrument gapped up becomes a support level.
If that’s true, then today’s low in DIA at 183.70 should hold. If not, for whatever the reason, it’s probably best to take prudence.
The Semiconductor chart shows not only one runaway gap but two, with the latest one occuring today. That led me to research how to asses how far the move of the gap should take the price up.
Gartley, who wrote extensively about trading in the 1930’s to 1940’s, has a relatively complicated mathematical equation to determine when the end of the gap’s move is near. The good news is that in the modern age, most charting platforms give you Fibonacci extension lines to help you figure out the approximate 40% Gartley used.
Whether today’s second runaway gap in Semi’s turns out to be more of an exhaustion gap remains to be seen. However, I would keep in mind that if the Dow trend is indeed weakening and Semi’s do exhibit exhaustion, the bullish sentiment could change dramatically.
S&P 500 (SPY) 215.80 the 10 DMA closest support
Russell 2000 (IWM) After 10 days in consolidation, IWM took out the high of the range and closed on another new 2016 high. 119.85 should now hold on a closing basis if this is to continue
Dow (DIA) Not only filled the gap but closed beneath the 10 DMA, first time since June 24th.
Nasdaq (QQQ) 112.75 the 10 DMA with today’s strong close near the resistance at 115
XLF (Financials) Consolidation mode which makes sense given the FOMC on tap
KRE (Regional Banks) Must end this week over 40.40 to change longer term trend to up
SMH (Semiconductors) 62.32 is the gap high to hold. Might see digestion, might see exhaustion. Be prepared for anything
IYT (Transportation) 143 pivotal and over 147 game changer
IBB (Biotechnology) Should hold 273.25 if good now and at some point clear 287
XRT (Retail) Must clear 45.80 for the month to be a game changer
IYR (Real Estate) 84 support
ITB (US Home Construction) Broke above the recent consolidation. 29.35 now support to hold
GLD (Gold Trust) 125 support and over 126.75 should resume uptrend
SLV (Silver) 18.35 support. Still bullish. Over 18.90 looks good
GDX (Gold Miners) Probably has more upside-over 29.20 would be a sign
USO (US Oil Fund) With a new 60+ day low in place, over 10.17 with volume on a closing basis could mean move down over
OIH (Oil Services) Turning out as the good low risk buy but no worries if watching to see post fed it holds 28.00
TAN (Guggenheim Solar Energy) Cleared 22.00. Might be bottomed for the longer term
TLT (iShares 20+ Year Treasuries) Fed meeting this week. Still in a bullish phase
UUP (Dollar Bull) 25.06 pivotal support
Every day you'll be prepared to trade with: