Gap-Downs Can Be a Good Thing

I would rather have a gap DOWN than a gap UP.

Technical Edge

• NYSE Breadth: 88.3% Downside Volume (!)

• NASDAQ Breadth: 85% Downside Volume (!)

The S&P’s best day last week was a decline of 0.97%. You know it’s bad when a near-1% loss is the standout day. 

Last night I tweeted that I did not like gap-ups during downtrends, when the ES and NQ futures were up about 0.75% on Sunday night. Now they are notably lower in the pre-market. 

Maybe that’s a good thing. 

A gap-down open at least gives bulls a chance to push the momentum back the other way. That’s rarely the case on a gap-up, as the sellers really lean into the indices and erase the gains. 

Game Plan

The further the S&P goes in one direction, the tighter the rubberband gets — eventually we’ll likely see a snap-back rally. 

However, I remain steadfast in one thing: This is not the environment to be a hero in. 

Over the weekend, we went over some trade setups and how we were navigating the market. But if this is not your type of environment, just know it. There’s no shame (in fact, there’s great strength) in knowing when to engage and when not to engage with the market. 

S&P 

SPY | Daily

Down almost 9% and the S&P 500 is on the verge of “correction territory” — a 10%-plus fall from the highs. The Nasdaq is already there, obviously. 

Looking at the SPY, we have a gap-fill area near $436, as well as the weekly VWAP measure and the 50-week moving average near $434. If all of these levels fail as support, the $428 to $430 area could be on tap. 

That was the fourth-quarter support zone and in the SPX index, that’s roughly 4300 to 4350. While it’s painful, it was always possible we tested this zone. We talked about it roughly a week ago.

I will say, somewhere in this area, I expect the S&P to find its footing. The question (to me) is, how big of a bounce will we see and how long will it last? 

For today, it’s somewhat simple: I’m watching $437.95. That’s Friday’s low and last week’s low. 

If the SPY gaps below it and quickly reclaims it, we could have a bullish reversal on our hands. Otherwise, I’m going to look for some kind of early low to try and navigate against. If the gap-down is too large, I may sit out completely of the S&P trade. 

Lastly, keep in mind that each day we have seen some kind of rally, but each day that rally has failed. Today may or may not be any different, but don’t get caught holding the bag if things go south. 

Nasdaq & Individual Stocks