Is a Gap Fill a Big Deal? It Depends.
A strong day in the major indices, but let's look at what volume, breadth, and two key ratios are indicating.
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It took all day, but the S&P finally filled that gap it left from Friday morning’s open. Is filling a gap a big deal? Yes and no. It’s a big deal (to me) if we rally and cannot fill it because that shows weakness. Filling the gap usually is a short-term move.
Breadth was terrific. It was not enough to change any of the indicators, though. Volume was quite low. In fact, both the NYSE and Nasdaq had the lowest volume since June 6th. Many will fuss that a low-volume rally is bearish. I would simply point out that almost all rallies in the last 15 years have been on low volume.
When it comes to volume, I am more interested in high volume declines because they tend to be clean-outs (bullish). When it comes to volume, I am more interested in how many shares are traded in penny stocks because that shows speculation. And it seems the speculators must be on holiday because Nasdaq only traded a mere 7.5 billion shares. Recall, a week or so ago, I noted the ten-day moving average of Nasdaq’s volume was over 10 billion shares, so this is down 30% from where we were in the prior three weeks.
Finally on the volume front, we saw 79% of the volume on the upside. There have been many studies done that say over 80%, especially two consecutive days, is bullish. So if you’re looking for something negative on volume because it was low, or something negative or bullish because we saw 79% on the upside, you will be grasping at straws to make a case for either side.
The chart that caught my eye was the ratio of the SOX to Nasdaq. I’ve written about this quite a bit lately, noting that the ratio never got anywhere near the old high from last year and it has been rolling over since early July. I continue to look for signs that this wants to turn back up but it has yet to do so and on Monday the semis underperformed Nasdaq.
And while we’re looking at ratios, the Bank Index relative to the S&P is also heading down and Monday’s rally didn’t change that. Because of that relationship I am going to keep a close eye on the Bank Index because it did not fill the gap from Friday and as I noted above, gaps that go unfilled are not bullish.
The next question surely will be how long we should give it to fill the gap. I give it at least a week. Especially in this case because I think if the market pulls back for the next day or so we’ll still be oversold enough to rally again.
