Gaps are simply the result of the battle between supply and demand at the opening bell. If supply wins then we gap down if demand wins we gap up. Depending on how much supply and demand has built up before the open will determine the size of the gap. However, what I am realizing is that gapping the market up or down is a great tactic to herd the masses in an intended direction. For example we spoke at length about my theory that markets were gapped above the supply area of 1684-92 in an effort to keep sellers at bay only to rally the markets effortlessly to new highs where I believe the big boys were able to distribute shares at will to those with hopes of seeing even higher highs. Unfortunately, those poor souls didn't see higher price instead they saw was once again prices fall.
What I found interesting was the recent price action around the 1687.2 level that I've been rambling on about. We showed in previous posts how a large amount of volume was transacted there recently. It was actually the largest amount volume that occurred in the 1684-92 area of supply we mentioned above. Having said that, below is a 10 min chart of the SPX for the past 2 days. Notice how price is gapped down right to the 1687 area (1687.26 to be exact) only to finding support at the psychological 50 day moving average (dma) at 1679. What is wonderful about the volume by price chart overlay is the ability to see how much volume is transacted at each price area. Notice how the 50 dma saw the most amount of volume transacted as it was forming a double bottom. That was obviously demand coming into the market. So what is the point? The point is that if gaps are really a result of the battle of supply and demand then it would make sense that the battle begins at an area of high volume just like the 1687.2 area. The second point is that gapping price to the 1687.2 level would have definitely triggered a sell off to a certain degree since we concluded this was a previous area of supply. Which is why I believe the weak hands holding at this level were shaken out of their positions only to see price find support at the 50dma and rally. Who said that market is an honest place to make a buck anyways?
Today's market action was bullish as prices closed near the highs of the day. on decent volume. However, the bullish bias was a result of Monday's trading. If we look at the following daily chart of the SPX you can see how price fell below the 50 dma (I think they call that running stops) only to recover to close slight above the middle of the price range on increased volume. The next couple of days should be interesting as the volume profile of the market continues to develop and we can look for the next logical support and resistance area using our point and figure charts and of course volume.
Thanks for reading.