Open Gaps Paint A Scary Picture
There is a theory in technical analysis that suggests “All Gaps Eventually Get Closed”. Over the yeas I have found that to be true. The case for gap closure is reinforced when there are multiple and large gaps pointing in the same direction.
If true, that represents very bad news for the market and the recent Trump inspired rally. The chart below represents the Dow Jones. Red circles represent large up gaps in the index (of at least 50-100 points). However, most other indices, volatility readings and high volume stocks have similar gaps. As you can see, they are numerous and significant.
What does all of that mean?
Simply put, the market is saying that it will eventually come back to close all of these gaps. The TIMING is in question, but not the result. Considering today’s crazy valuation levels, overbought conditions and bullish sentiment, that time might soon be at hand.