Upside Gap/Black Candlestick and 1%+ Gain on ‘Expiration Friday’ Short-term Negatives

From my Monday, March 24th column... "When S&P futures post two unfilled
upside gaps within a one-month time frame, it's generally a bullish indication
for the following month. Gaps are normally filled in short order, but when
sellers can't drive the market lower to fill a gap and then a second upside
gap appears, it's usually a sign that sellers are overwhelmed. While
conditions can often turn choppy after the second gap, the market has a solid
track record of rebounding from short-term weakness and settling flat-to-
higher one month later."

With Friday's unfilled upside gap, the second in just the last three days,
this setup has been triggered once again. At this point I'd think we're in for
more of a 'flat' month, but this does imply the market's likely to remain
generally resilient heading into mid-May. See my 3/24 column for a complete
track record of this setup since 1990.

While upside gaps can reflect a market in the midst of a runaway move to the
upside, these cases invariably coincide with a close greater than the open,
creating a 'white' candle in candlestick charting. But on Friday, S&P futures
posted an unfilled upside gap that coincided with a black candle, meaning the
close was below the open. This reflects short-term weakness, as the market
lost upside momentum soon after the opening and drifted sideways into the
close. Since 1990, there have been a total of 21 instances of upside gaps in
the front-month S&P futures contract that coincided with a black candlestick.
In only two cases was the gap not filled at some point over the next six
sessions, suggesting we'll most likely see June S&Ps trade back down to the
1374 level at some point this coming week...

S&P Futures Unfilled Upside Gap w/ Black Candlestick
04/18/08... ???
09/19/07... Gap filled one day later
08/17/07... Gap not filled within fifteen days (*)
06/15/07... Gap filled two days later
06/17/05... Gap filled one day later
10/04/04... Gap filled one day later
04/02/04... Gap filled four days later
10/03/03... Gap filled fifteen days later (*)
07/14/03... Gap filled one day later
11/04/02... Gap filled two days later
10/17/02... Gap filled one day later
03/06/01... Gap filled three days later
11/27/00... Gap filled one day later
06/02/00... Gap filled six days later
09/27/99... Gap filled one day later
10/12/98... Gap filled one day later
12/20/96... Gap filled one day later
10/13/95... Gap filled one day later
10/13/94... Gap filled one day later
06/12/92... Gap filled one day later
10/19/90... Gap filled four days later
01/19/90... Gap filled one day later

Another short-term negative for the market can be seen on the chart of the
NASDAQ Volatility Index, which closed in statistically oversold territory for
a second day in a row Friday. Historically this has generally been a short-
term negative sign for the Nasdaq. Out of 12 occurrences since 2001, all but
one led to a lower NDX 2-5 trading days later.

Also interesting to note that Friday's big gain coincided with options
expiration. Listed in the table below is every instance over the past two
decades in which the S&P closed up 1% or more on Expiration Friday...

S&P500 +1.0% on Expiration Friday
04/18/08... S&P500 ??? one week later
03/20/08... S&P500 -1.1% one week later
12/21/07... S&P500 -1.1% one week later
08/17/07... S&P500 +2.3% one week later
07/18/03... S&P500 +0.5% one week later
04/17/03... S&P500 +0.6% one week later
03/21/03... S&P500 -3.6% one week later
02/21/03... S&P500 -0.8% one week later
12/20/02... S&P500 -1.8% one week later
03/15/02... S&P500 -1.5% one week later
09/17/99... S&P500 -4.4% one week later
01/15/99... S&P500 -0.8% one week later
04/17/98... S&P500 -1.3% one week later
01/16/98... S&P500 -0.5% one week later
12/18/92... S&P500 -0.5% one week later
12/20/91... S&P500 +7.3% one week later
02/15/91... S&P500 -0.5% one week later
01/18/91... S&P500 +1.2% one week later
10/19/90... S&P500 -2.5% one week later
03/16/90... S&P500 -1.4% one week later
05/19/89... S&P500 +0.1% one week later
04/21/89... S&P500 +0.0% one week later
02/19/88... S&P500 +0.3% one week later
01/15/88... S&P500 -2.2% one week later

Note that the S&P was roughly twice as likely to trade lower the following
week. Out of 23 occurrences over the last two decades, only three saw the S&P
gain 1% or more the following week. The other twenty times saw the S&P trade
flat-to-down, suggesting a big move on Expiration Friday often means buying
power is at or near a short-term exhaustion point.

Categories : Archived EOD Commentary, End-of-Day Commentary

 Print This Post