Well, as I was reading about gaps in "Technical Analysis of Financial Markets" by John J Murphy last night, I was particularly interested in the section describing the island reversal pattern as that happened to be the section I was reading (and I have wanted to learn more about gaps implications for a while). As I also observed the futures market last night and saw that there was a significant potential for the SPY to gap down on the open today, my interest in this pattern was even more peaked.
So, this may be a misapplication (particularly the initial breakaway gap on 5/9), but I the implications are probably valid particularly if you isolate the trading pattern as I have labeled as a Y wave (of the larger wave C within this ABCDE correction that constitutes an even larger wave B within the cycle ABC correction...got that).
So what we have here would be the following:
Breakaway gap formed on 5/9/2018. Next trading day we have a runaway gap formed 5/10. Finally, to conclude the uptrend we observed an exhaustion gap yesterday, 5/14.
Today's gap down was a bearish breakaway gap that resulted in the island reversal pattern formation.
So, what is the implication of all this?
Well, as the name implies, a reversal gap tends to signify a reversal in trend. How big this reversal will be is still up to debate, but my bias as my chart above suggests is that this is just the first move down of a larger downward move that should take SPY to retest the lower trend line.
I'm open to several other scenarios playing out besides the primary one show above.
Scenario 1 is my current working thesis in which we are on Wave B of a larger ABC correction. This wave B is an ABCDE type correction (a 3-3-3-3-3 correction as seen by the XYZ labeled waves). Under this scenario, we get a move to the lower trend line, one final bounce up off this trend line in the region of $261-262. We move up to test the upper trend line around $275-276. The final fall ensues and SPY falls toward $242 range before the next significant reversal.
Scenario 2 could see a 50% retracement of the recent move up, putting a reversal in the SPY right around $266.5. If this were to move on up and break the trend line/channel as drawn, then it would suggest a possible Wave 1 up and lead me to take a long position in the market. Of course a bullish reversal could occur at any point, but given the island reversal pattern, I expect that we have significantly more downward movement to go before we can potentially fill the downward breakaway gap and re-test the island region.
Scenario 3 would be a break of the lower trend line/channel and suggest a very bearish move. A break of the lower trend line would lead me to increase my current short position (especially with a break of support at $254) as I would see this as a sign SPY has completed wave B. The wave C move down to around $242 would therefore be underway.
I'd love your comments if you have any to offer!
Like if this was helpful or entertaining (even if for a laugh).
So, this may be a misapplication (particularly the initial breakaway gap on 5/9), but I the implications are probably valid particularly if you isolate the trading pattern as I have labeled as a Y wave (of the larger wave C within this ABCDE correction that constitutes an even larger wave B within the cycle ABC correction...got that).
So what we have here would be the following:
Breakaway gap formed on 5/9/2018. Next trading day we have a runaway gap formed 5/10. Finally, to conclude the uptrend we observed an exhaustion gap yesterday, 5/14.
Today's gap down was a bearish breakaway gap that resulted in the island reversal pattern formation.
So, what is the implication of all this?
Well, as the name implies, a reversal gap tends to signify a reversal in trend. How big this reversal will be is still up to debate, but my bias as my chart above suggests is that this is just the first move down of a larger downward move that should take SPY to retest the lower trend line.
I'm open to several other scenarios playing out besides the primary one show above.
Scenario 1 is my current working thesis in which we are on Wave B of a larger ABC correction. This wave B is an ABCDE type correction (a 3-3-3-3-3 correction as seen by the XYZ labeled waves). Under this scenario, we get a move to the lower trend line, one final bounce up off this trend line in the region of $261-262. We move up to test the upper trend line around $275-276. The final fall ensues and SPY falls toward $242 range before the next significant reversal.
Scenario 2 could see a 50% retracement of the recent move up, putting a reversal in the SPY right around $266.5. If this were to move on up and break the trend line/channel as drawn, then it would suggest a possible Wave 1 up and lead me to take a long position in the market. Of course a bullish reversal could occur at any point, but given the island reversal pattern, I expect that we have significantly more downward movement to go before we can potentially fill the downward breakaway gap and re-test the island region.
Scenario 3 would be a break of the lower trend line/channel and suggest a very bearish move. A break of the lower trend line would lead me to increase my current short position (especially with a break of support at $254) as I would see this as a sign SPY has completed wave B. The wave C move down to around $242 would therefore be underway.
I'd love your comments if you have any to offer!
Like if this was helpful or entertaining (even if for a laugh).