Gap & Go Price Pattern, Plus Why September is a Pivotal Month

Breadth settled 2:1 positive for a fourth consecutive session Wednesday. This is only the tenth time since 1990 that we’ve seen three consecutive days of 2:1+ positive breadth. In eight of those ten cases, the S&P was higher two sessions later, suggesting the S&P will hold above 1025 on Thursday. New 52-week highs declined (just barely) from Tuesday, triggering the three-day sell setup discussed earlier today. We also settled at a fresh six-month high, suggesting range-bound trade on Thursday. While those studies point to choppy trade over the next few sessions, a price pattern on the S&P futures chart is pointing to a close above today’s settlement on Friday. Note that the S&Ps posted a higher high, higher low and a higher close on the heels of Tuesday’s unfilled upside gap. This ‘gap and go’ pattern is typically a bullish indication looking out two trading days, which makes sense considering that a rally day immediately after an upside gap suggests bullish momentum remains intact. The last thirty times that the front-month S&P contract posted a higher high, low and close immediately after an unfilled upside gap are listed in the table below…

S&P Futures Post Higher High, Low & Close After Upside Gap
09/09/09… S&P futures ??? two sessions later
07/16/09… S&P futures +1.4% two sessions later
06/02/09… S&P futures -0.2% two sessions later
05/05/09… S&P futures +0.4% two  sessions later
04/13/09… S&P futures -0.6% two sessions later
11/25/08… S&P futures +4.9% two sessions later
04/17/08… S&P futures +1.2% two sessions later
04/02/08… S&P futures +0.1% two sessions later
12/24/07… S&P futures -1.1% two sessions later
12/06/07… S&P futures +0.8% two sessions later
11/29/07… S&P futures +0.3% two sessions later
07/13/07… S&P futures -0.1% two sessions later
04/17/07… S&P futures +0.1% two sessions later
02/15/07… S&P futures +0.2% two sessions later
11/30/06… S&P futures +0.6% two sessions later
08/17/06… S&P futures +0.1% two sessions later
11/18/05… S&P futures +1.0% two sessions later
05/27/05… S&P futures +0.1% two sessions later
05/19/05… S&P futures +0.4% two sessions later
02/01/05… S&P futures +0.0% two sessions later
10/04/04… S&P futures +0.6% two sessions later
04/05/04… S&P futures -0.5% two sessions later
11/25/03… S&P futures +0.4% two sessions later
03/14/03… S&P futures +4.0% two sessions later
01/03/03… S&P futures +1.5% two sessions later
11/15/02… S&P futures -1.2% two  sessions later
10/14/02… S&P futures +2.5% two sessions later
07/30/02… S&P futures -2.4% two  sessions later
06/18/02… S&P futures -3.6% two  sessions later
11/14/01… S&P futures -0.3% two sessions later
09/25/01… S&P futures +0.4% two sessions later

Note that in 21 out of 30 occurrences, or 70% of the time, the S&Ps were trading higher two sessions later, well above the 52% random odds of a higher S&P two days later.

With the S&P currently up 1%+ for the month, now’s a good time to remember that September is a pivotal month in terms of how the market performs in the final quarter. When the S&P fails to rally in September, it sets up the potential for some ugly finishes to the year. That was the case last year, as well as during the 2000-2002 decline, the ’87 crash and throughout most of the 70′s trading range. But when the market rallies in September, it tells you that in all likelihood, a classic year-end rally is forthcoming. Consider that an ‘up September’ has a strong track record at calling for a subsequently higher monthly close by the end of the year. Going all the way back to 1950, there have been 26 years in which the S&P500 closed out the month of September with a gain (see table below.) In 24 out of 26 years, the S&P proceeded to post a subsequently higher close within the next three months, and typically within 1-2 months. In only one year out of 26 did the S&P lose any substantial ground…

When the S&P500 Rallies in September
09/28/07… S&P500 +1.5% one month later
09/29/06… S&P500 +3.2% one month later
09/30/05… S&P500 +1.7% two months later
09/30/04… S&P500 +1.4% one month later
09/30/98… S&P500 +8.0% one month later
09/30/97… S&P500 +0.1% two months later
09/30/96… S&P500 +2.6% one month later
09/29/95… S&P500 +3.6% two months later
09/30/92… S&P500 +0.2% one month later
09/30/88… S&P500 +2.6% one month later
09/30/83… S&P500 +0.2% two months later
09/30/82… S&P500 +11.0% one month later
09/30/80… S&P500 +1.6% one month later
09/30/76… S&P500 +2.1% three months later
09/28/73… S&P500 -10.0% three months later (*)
09/30/70… S&P500 +3.4% two months later
09/30/68… S&P500 +0.7% one month later
09/29/67… S&P500 -0.3% three months later
09/30/65… S&P500 +2.7% one month later
09/30/64… S&P500 +0.8% one month later
09/30/58… S&P500 +2.5% one month later
09/28/56… S&P500 +0.5% one month later
09/30/55… S&P500 +4.2% two months later
09/30/54… S&P500 +6.0% two months later
09/30/53… S&P500 +5.1% one month later
09/29/50… S&P500 +0.4% one month later

This same setup can also be utilized in a slightly longer-term format by simply looking at how the S&P performed over the next three months (until the end of the year.) This has more telling implications for the market’s long-term performance as it tells you if the gains are typically sustainable through year-end. As the table below illustrates, the gains are indeed sustainable in the majority of cases. Again looking at the twenty-six years since 1950 in which the S&P rallied in September, we find that the S&P was trading at an even higher level at the end of the year in every case but four. And in two out of the four years the S&P failed to settle higher at year-end, it was down less than 1% compared with its September settlement. So really, there were only two years out of twenty-six in which an ‘up September’ truly failed to lead to any end-of-year strength…

When the S&P500 Rallies in September
09/28/07… S&P500 -3.8% at year-end (*)
09/29/06… S&P500 +6.2% at year-end
09/30/05… S&P500 +1.6% at year-end
09/30/04… S&P500 +8.7% at year-end
09/30/98… S&P500 +20.9% at year-end
09/30/97… S&P500 +2.4% at year-end
09/30/96… S&P500 +7.8% at year-end
09/29/95… S&P500 +5.4% at year-end
09/30/92… S&P500 +4.3% at year-end
09/30/88… S&P500 +2.1% at year-end
09/30/83… S&P500 -0.7% at year-end
09/30/82… S&P500 +16.8% at year-end
09/30/80… S&P500 +8.2% at year-end
09/30/76… S&P500 +2.1% at year-end
09/28/73… S&P500 -10.0% at year-end (*)
09/30/70… S&P500 +9.3% at year-end
09/30/68… S&P500 +1.2% at year-end
09/29/67… S&P500 -0.3% at year-end
09/30/65… S&P500 +2.8% at year-end
09/30/64… S&P500 +0.7% at year-end
09/30/58… S&P500 +10.3% at year-end
09/28/56… S&P500 +2.9% at year-end
09/30/55… S&P500 +4.1% at year-end
09/30/54… S&P500 +11.4% at year-end
09/30/53… S&P500 +6.3% at year-end
09/29/50… S&P500 +4.9% at year-end

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

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