Market Update: Filling in the Gaps

For me, one of the privileges of being a former financial journalist was the opportunity to talk to many kinds of traders and investors, each with their own methodology.

For example, years ago (I'm talking the 1990s now) I talked with a trader whose method worked off of one simple observation.

Boiled down, he used the slogan "gaps are made to be filled."

A "gap" on a chart is created whenever a stock suddenly shoots higher (or lower) between one day's trading session and the next. Sometimes the "gap" can be quite large.

For example, here's a very large gap that was created in Meta (META)'s stock in early 2022. The company reported disappointing news about its earnings the prior day, with its share price opening the next trading session more than 20% lower:

Most of us never pay attention to these gaps. But my trader friend made a habit of noting them, and tracking their existence on his charts.

He noticed that sooner or later the same stock (or stock index or ETF) - sometimes days, weeks, months or even years later - would surge up (or down) in price to "fill" the prior gap on the chart.

He also noticed that often (though not always), the same stock - after having "filled the gap"- reversed course, and began moving in the opposite direction.

So it became an observational tool for him (and me as well, after talking with him). If a sharp rise (or decline) in a stock couldn't be explained or theorized by other means, look for a prior gap on the chart and presume that maybe the stock is "aiming" to fill it.

For example, here's the same chart of Meta (META). But notice how the stock surged towards the old gap created in 2022? The job is nearly done:

Hence, the slogan that "gaps were made to be filled."

My sense is that a chart gap is sort of like "unfinished business" and marks a point where a lot of investors were left behind as a stock fell (or rose) sharply. So the gap serves as a kind of "second chance" marker for them to take action, and either buy or sell the stock in question, which is why a reversal sometimes happens after the c gap is filled.

It's important to note that it doesn't always work out that way (nothing ever does with absolute certainty on Wall Street). But it happens often enough that I try to make a note of important gaps in the charts of varios stocks, indexes and ETFs.

So I've been watching 2 important gaps on the Nasdaq's charts in recent weeks. For example, the Nasdaq 100 (QQQ) which represents the biggest stocks on the index, had a longstanding gap in its chart from the 2022 downturn - that was filled in last week's market surge:

But if you look at the next chart below, there's also the Nasdaq Composite index (IXIC). It's comprised of a wider array of 3,500 companies, many of them tech, but also banks, construction firms, and small retailers.

Its gap from the same period of 2022 hasn't been filled just yet. But I think there's a better-than-even chance the Nasdaq rally will continue to sputter along and fill that gap, either this month or in July:

The bigger question is what happens afterward. The dotted red lines are my general idea, a guess, about the roadmap before us.

As I've noted before, I have my doubts about the stock market's current rally. But half the battle in the Wall Street game is knowing when to play along, and when to sense - like an approaching rainstorm - when there's a change in the air.

I don't think we're there yet. I think the next 2 months could be very slow and kind of dull as the market plods along towards Labor Day (it's amazing how often Labor Day weekend serves as a point to turn from a buyer into a seller for Wall Street pros).

But the Nasdaq indexes (the Nasdaq 100, and the Nasdaq Composite) "filling their gaps" would be a good clue that the best of the market rally is behind us, and to expect potential changes ahead.  

Best of goodBUYs,

Jeff Yastine