Euphoric Failure on the S&P 500
Today’s gap-up open on the S&P 500 is what I am calling a “euphoric failure” because the morning’s euphoria was much weaker than the last two such events. I have marked the last three gap-up openings “A”, “B”, and “C” on the SPY chart below:
Click for larger chart
After Gap A, the market was able to hold onto most of the gains with little trouble.
After Gap B, the market held onto less of its gains after a struggle.
After Gap C today, the market lost ground. Also notice that today’s gap was much smaller despite coming off of a very strong reversal.
I interpret this trend as a thinning-out of the enthusiastic crowd of buyers who think that the recession is already over. Or you might say that the market is running out of baby seals to club.
Also notice how strongly the market sprang off of the lower trend line (purple) the first time it hit it back in April. This time, the snap-back is much weaker so far, and returning to the top of the trend line looks impossible.
The rally is weakening as it runs out of believers.
May 13th, 2008 at 4:33 pm
Hi Matt, how do you define a gap-up? Why didn’t you take yesterday
as a gap-up? Does it have to be red? Thanks for clarification.
May 13th, 2008 at 7:38 pm
Hi Dressguard,
Yes, you’re right; I should have clarified that. What I’m really talking about is an “exhaustion gap”. When you get a gap up, and then a red candle, it shows that the population of buyers has become exhausted and the trend has reversed.
So, by comparing the exhaustion gaps, I am looking at how much enthusiasm the buyers were able to generate on these climax days.
Matt
May 14th, 2008 at 12:15 pm
Matt,
I’m afraid I can’t see any weakness today. What’s your opinion?
May 14th, 2008 at 1:13 pm
Dressguard,
It’s a pretty good rally, but if you compare it to recent “Gap and Go” days, it is only about half as strong. The day isn’t over yet, but it is hard for the S&P to put on a show when the financial are dead in the water. Since the big slide on Wednesday, the financials have flat-lined.
Matt
May 14th, 2008 at 2:59 pm
“The day isn’t over yet”
You are so right. I couldn’t agree more. Big sell-off at the end of the session.
May 14th, 2008 at 3:17 pm
The bull managed to maintain his dignity by closing in the green, but it was a terribly disappointing pop-and-flop. Bulls will be hesitant to chase things up now, and this fits well with my theme of a weakening bear-market rally.