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At the beginning of last month, that sharp broad market 2-3% correction not only failed to follow-through lower, but was also aggressively bought and led to a steep move higher. In fact, the rally did not even briefly backtest its breakout point, which was roughly $138 on the SPY. If you follow my work, then you know I had discussed this open gap quite a few times, even as it seemed as though we would never fill the void. However, most gaps get filled, which is why they are called “common gaps.” The unfilled gaps are exceptions to the rule. Like an arch-nemisis that you think you have left in the past, those gaps usually come home to roost.
Currently, the SPY has gone roundtrip back down to the scene of that cup and handle breakout and open gap from early-March. The pressing issue right now is whether this is a mere backtest, or whether we break the $138 level. If it is the former, then I think we may very well have seen the worst of this little correction.
If we lose it, though, it could easily presage a steeper correction. This morning, we are losing the level after yesterday afternoon’s weak bounce. I am sitting in cash and have yet to act on the assumption that we hold this level. In fact, I am resisting the urge to assume that is the case at all.
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LOL