SPY Gap Repetition Breeds Familiarity

Dec 29, 2009: 12:11 PM CST

… and “Familiarity Breeds Contempt.”  Let’s take a quick pure price look at the recent five overnight gaps in the SPY – S&P 500 during the oozing uptrend that is taking place in the holiday bullish seasonality in the US Equity Markets.

I often use pure price charts to discover any specific repetitive pattern in price action that I might otherwise miss when looking at a chart with lots of indicators.

In this way, you can discover the ‘character’ or behavior of a market.

Starting with December 21st (not shown on left), price has gapped higher six days in a row.

With the exception of December 21st and December 24th (the day before the Christmas holiday – which is seasonally very bullish), price has suddenly fallen lower after the gap and filled the gap (falling just shy of a full fill on the 22nd) almost as quickly as it formed.

To me, this is evidence of “popped stops,” which occurs when a key resistance level is broken and short-sellers push the market higher.  Were this true bullish aggressive buying, we would see no gap fills.

Volume is also declining during this price rally.  That’s not the sign of bullish strength either.

However, none of that matters as long as price continues to rise, and the pattern – almost like clockwork – has repeated for 5 of the last 6 trading days (which would be 5 of 5 if we exclude the December 24th half-day).

The second part of the pattern is the afternoon ‘ooze’ or upward creep into the close.  It’s almost like a two-step dance the market is weaving.

Step 1:  Gap up in the morning.  Immediately fall after the gap.
Step 2:  Creep Upwards all day into the close.

That’s not to say that the pattern will repeat forever – it clearly will not – but as long as the pattern does repeat, it has provided a roadmap and trade-able edge to those who have perceived it – to those who have stepped back and observed the character and repetitive pattern in price.

Indicators have their place – but it is equally if not more important to look directly at price, observe repeating patterns, and trade those with the expectation that the pattern might repeat, even if it is in conflict with our favorite indicators.

And, if anything, we can file this under “very interesting.”

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

16 Comments

16 Responses to “SPY Gap Repetition Breeds Familiarity”

  1. BuilderBob Says:

    Been watching this too, only thing I would add is that $US DXY has been slowly drifting since 1223,
    with today's sharp reversal (upward) the Indices may have trouble with this pattern. FWIW

  2. Kevin Says:

    I think it's interesting too, but alas, now that you showed it to me, it's probably gotten too noticeable and won't work anymore. <grin>

  3. Corey Rosenbloom, CMT Says:

    Haha – I had that passing thought before posting the article but I'm not big enough to believe that my post will change the course of the market in any way.

    However, should the market fall from here, the bears can thank me. 🙂

  4. Corey Rosenbloom, CMT Says:

    True, Bob.

    The Dollar caught a strong bid this morning and continues its rally. Along with stocks – which is an interesting turn of events.

    I think it's just end-of-year low volume so markets can be pushed and shoved. We'll see how this pattern continues when volume picks back up into January.

  5. thetradedetective Says:

    hey corey,

    in your opinion, if the SPX closes down today, is the Santa Claus rally a bust?

  6. Corey Rosenbloom, CMT Says:

    I would say this was one of the better Santa Claus rallies we've had, if we mean that the Santa Claus rally happens in the days or week before Christmas (last Friday this year).

    To see a chart like this which is a 45 degree angle up, that is the definition of a “Santa Claus Rally.” Christmas is over now, unless we mean that the rally must carry forward into the New Year. I take it to mean the days just prior to the Christmas holiday, so using that definition, the Santa Claus rally was a great success this year.

    Now we start to talk about the “End of Year” positioning and then the New Years period – Santa has passed.

  7. thetradedetective Says:

    haha, I have always though of the santa claus rally as happening the week after christmas and the first two trading days in January. So by that definition I think we agree… Now let's see if 1121 can turn into support….

  8. Corey Rosenbloom, CMT Says:

    Hmm. You learn something new every day. I always attributed the Santa Claus rally to the week or days prior to Christmas, but officially, you're right, according to Wikipedia:

    http://en.wikipedia.org/wiki/Santa_Claus_rally

    It is defined as:

    “…rise in stock prices in the month of December, generally seen over the final week of trading prior to the new year. The rally is generally attributed to anticipation of the January effect, an injection of additional funds into the market, and to additional trades which must, for accounting and tax reasons, be completed by the end of the year. The Santa Claus rally is also known as the “December Effect.”

  9. BuilderBob Says:

    Been watching this too, only thing I would add is that $US DXY has been slowly drifting since 1223,
    with today's sharp reversal (upward) the Indices may have trouble with this pattern. FWIW

  10. Kevin Says:

    I think it's interesting too, but alas, now that you showed it to me, it's probably gotten too noticeable and won't work anymore. <grin>

  11. Corey Rosenbloom, CMT Says:

    Haha – I had that passing thought before posting the article but I'm not big enough to believe that my post will change the course of the market in any way.

    However, should the market fall from here, the bears can thank me. 🙂

  12. Corey Rosenbloom, CMT Says:

    True, Bob.

    The Dollar caught a strong bid this morning and continues its rally. Along with stocks – which is an interesting turn of events.

    I think it's just end-of-year low volume so markets can be pushed and shoved. We'll see how this pattern continues when volume picks back up into January.

  13. thetradedetective Says:

    hey corey,

    in your opinion, if the SPX closes down today, is the Santa Claus rally a bust?

  14. Corey Rosenbloom, CMT Says:

    I would say this was one of the better Santa Claus rallies we've had, if we mean that the Santa Claus rally happens in the days or week before Christmas (last Friday this year).

    To see a chart like this which is a 45 degree angle up, that is the definition of a “Santa Claus Rally.” Christmas is over now, unless we mean that the rally must carry forward into the New Year. I take it to mean the days just prior to the Christmas holiday, so using that definition, the Santa Claus rally was a great success this year.

    Now we start to talk about the “End of Year” positioning and then the New Years period – Santa has passed.

  15. thetradedetective Says:

    haha, I have always though of the santa claus rally as happening the week after christmas and the first two trading days in January. So by that definition I think we agree… Now let's see if 1121 can turn into support….

  16. Corey Rosenbloom, CMT Says:

    Hmm. You learn something new every day. I always attributed the Santa Claus rally to the week or days prior to Christmas, but officially, you're right, according to Wikipedia:

    http://en.wikipedia.org/wiki/Santa_Claus_rally

    It is defined as:

    “…rise in stock prices in the month of December, generally seen over the final week of trading prior to the new year. The rally is generally attributed to anticipation of the January effect, an injection of additional funds into the market, and to additional trades which must, for accounting and tax reasons, be completed by the end of the year. The Santa Claus rally is also known as the “December Effect.”