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Ep 93: Looking at Stock Market Gaps & All Time Highs

July 14th, 2016

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Welcome to episode number 93 on let’s talk stocks. I’m Sasha Evdakov and today what I’d like to focus on gaps and setting all-time highs.

In the S&P we’ve basically come into all-time highs, so if you take a look at the SPY, we’re breaking out on a clear break out right here, and one thing I’ve talked about in the past was that if we do break out to higher prices, I want to see that volume coming in.

Right now, if we’re looking at the volume, it’s somewhat with this Brexit that’s coming in, it’s somewhat weak on the break out.
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That doesn’t mean we can’t continue to move higher, because price after all is key, and then you want to see the volume. The volume tells you if things are sustainable, or if the move is real.

When putting these few things together, now it allows you to really start seeing things. Ok, what’s real, what’s not? And then trade accordingly.

If you use another indicator, you can use Mac-D, stochastic, Bollinger bands, that’s one of the ones I like to sometimes take a look at. To see how far extended that price is, and you can see these Bollinger bands are really wide, even though we’ve kind of been climbing up a little bit, little at a time here now, we did kind of explode right around this time region, the last few days, and then the last couple of day It’s been a slower incline, it’s been decelerating.
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I start looking at this, and I start looking at the other end of the Bollinger band, and I start evaluating the chart, and one of the things I’m noticing is, if you look at the gaps, the gaps that we have available, and I’ll zoom in here, maybe to an hourly chart, you’ll slowly notice that there’s a few different gaps that weave.

For example we have a gap right here, down on June 28th, that’s one gap that hasn’t been filled. We have another gap over her, so we’ve been constantly gapping up without pull backs and retracements, and this becomes a really dangerous state.
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If you also look at the state and the fear versus greed in the market, all those indicators point to euphoria, almost to the point where people are so excited to buy that they can’t lose. Since central bankers are printing money, they have their backs; you can’t go wrong with buying in the market.

This is where a lot of retail investors get in, and they slowly keep pumping things up. Now, keep in mind, markets still can have major pullbacks.

When you have a lot of gaps like this, it really starts to concern me, especially when you’re on an overextended run, where you shot down on such heavy volume right here, and now you look at the volume that’s been declining, and now look at the red bars that are starting to build up.
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This might still take one or two months to build up, but you can see that the volume is actually declining. This is on just the last month or two. So we’re looking at the month or two timeframe.

Whereas compared to the selloff, people were in a state of panic, and now everything is great, so the market keeps climbing, gapping up, and it’s a real big concern to me.

Where I would get out of that concern? Is if we go ahead and let’s just say we base here for a little bit, or we shoot up a little bit, and then we pull back and we retest this level, because I’d like to retest this level to really see if it’s real, if the move is legitimate.

Respect the movement of the market but don’t buy into it

If this becomes support and we come back into it, and we bounce heavily on it, then I could say, ok, the move is more real, but right now I still respect the price action, but I don’t see that it’s real.
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You can respect the move, but that doesn’t mean you have to buy into it, because you’re so extended and you don’t want to be the one that’s buying at all-time highs, and then when you see this thing rip out from under you to fill these gaps, that could be trouble.

This could take about a month, it could take two months, it just depends. It could come back; it could come up into higher prices, up until this level. It could be over extended, remember, these markets get over extended on both ways, to the downside and to the upside.
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But as far as looking at these gaps, a lot of times these gaps act as support and resistance.

When you get into these levels, so you could see right here, when we draw the line of these highs on July 1st and then you have July 7th here you have these swing highs. You can see we gapped up, but we gapped up right into that support level. But we didn’t fill that gap. Those are things that you want to pay close attention to.
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Gaps have weak support and resistance

In the course I talk about the 4 different types of gaps, there are a couple of different types of gaps. And really here what we’re getting is run away gaps. And when you’re looking at the gaps the reason why it’s important to look at the gaps and understand the gaps is because when you have a gap in price, what you want to think about on this is when a stock pulls back, it always comes down to those support and resistance level. Just like we talked about episode 92, support and resistance and the energy of stocks.

With a gap, what’s happening is you have weak support and resistance, there’s no buyers at that level, and there’s not a lot of sellers at that level, there’s basically no a lot of support area at that level to sustain that stock, so typically if a stock gets into this level, if it’s in this gap level, let’s say, if they get in there, it’ll typically fill the gap.

And that’s what makes the stocks really sell off in a bad way, because once you get into the first level, then you can continue, and if it breaks through, it can get into the second gap, then it can break through and it can get into the third gap.

The bridge analogy

Think of this gaps as more like if you’re walking on a bridge, and that bridge just has one or two planks, here and there, and you have to hop over water with alligators under it. So you have these alligators on the bottom, in this river, like in Indiana Jones, and you’re walking on this rope bridge, and if you have gaps, that means some of those boards are missing.

And you’re more than likely going to hit those boards, the more gaps that you have and the wider that gap is, so if there’s five boards missing, rather than one or two boards missing, you’re more likely to slip, trip, fall, and you’re going to go south, you’re going to fall into the pit of alligators.

The same thing here, when you’re looking at these gaps, you want to take and pay close attention to that, especially when things are exploding to the upside in this big way.
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Fear versus greed

When you look at the fear versus greed indicator here, you can take a look here on CNN money, once you get into these levels right here on extreme greed, keep in mind, the market usually, if you go with the trend, that’s fine in terms of the price action and the chart, but once you get into extreme greed levels, you’ll be able to see that with the prices themselves, the prices and the indicators, they all work together.
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If you’re the person that thinks that this is normal, when we get a normal incline like this at this angle, then you need to take a step back and evaluate and take a look at what’s going on, is the market really that healthy?
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Typically, the market all works together, so you’ll have earnings that are either blowout earnings, you have great economies, and right now for me I don’t see that, that’s why I don’t buy into it.

Even though we’ve broken down in 3 days, but 3 days in market terms is not that big, so I want to see above these highs for a good week, two weeks, three weeks, maybe even a month would be nice, and then a pull back to retest, then that would really confirm to me higher prices

But the safer approach is really to move into this angle, a little bit slower angle, that’s safer because you don’t have the gabs, that’s a little more sustainable, but here when we break out this high, that fast, you can look at the Bollinger bands at how they’re over extended, we’re at the upper end of that, which means we’re kind of over bought on the short term.
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You look at this fear and greed index as well, If you look at your Mac D and stochastic, what it’s going to tell you is the same concept, if you zoom into this and you look at the volume here, the mac D and stochastic they play off of the volume, they’ll you the same kind of concept, that the volume is declining as we continue to power higher, because there’s a divergence between the previous volume on this sell off.
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What are the macroeconomics telling you?

Those are some concerning signs to me, now again, that doesn’t mean you can’t go higher, because you have to respect the price action, but what I do then is if you look at the big economics at the macroeconomics that we’ve talked about in the past, and you take a look at those and you see the underlying part of it, what is the big economics telling you, are prices going higher?

For me, again, I don’t see the way that the moves are moving in the stock market correlating to the fundamentals, and those of you that have been with me for a while, you know that typically great fundamentals have great charts, and great charts have great fundamentals. Right now I’m not seeing that.

If you’re more into charts, what you could do is take a look at the Wilshire 5000 which is pretty much a full total stock market index, and you can see it’s breaking out of this level, but really it’s not at all-time highs, we have to break out right here at this level to make really all-time highs, true all-time highs in the stock market.
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Most people don’t pay attention to this, because it’s the full cap, but this is kind of the overall stock market that you want to see, so again, the Wilshire 5000, and then of course you look at the other indicators, the IWM, this is the Russell, when you see the Russell coming into resistance right her, can It break higher? Yes, it can come up to this level, but we’re not at all-time highs, this is the IWM.
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The Rustle, same thing, you can see coming in right here, we’re not really at all-time high, so once all these start to get going with it together, then I could say, ok, where we’re really breaking all-time highs, and that’s when I would buy the market heading higher.

You can lose months of gains in a few days

Until that point, until all of these are working together, I’m a little bit more concerned and that is because I’ve seen some nasty pull backs over the years where these bars and you’ve seen it with the Brexit bars, those bars, they can come in very quickly on the sell side and take out a month of gain in one day, two months, three months, five months of gains in one to two days, and that can be really terrifying on the bearish side, more so then on the buying side.
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I understand we’re climbing here ten points, another ten points, another ten points, almost to the point where it seems like the stock market can’t go wrong.

Not everybody can be on one side of the trade

But for those of you that know, the market had pull backs, those of you that have seen it come back, it always comes back, it always comes back, it’s just a question of when, not if, but there’s always going to be red bars, there’s always going to be green bars, it’s going to happen, because if you have everybody on one side of the trade, if everybody is on the buy side, who are you going to sell to?

Later there’s no one else to buy, if everybody bought, then who else is going to buy it to keep stock prices, keep pushing higher, then eventually get people coming into the sell side, so all those buyers will have to become sellers, so think about it that way if it helps you to think about it in extreme ways to go to the buy side, to the sell side.

if everybody is on the sell side, the same thing happens. Everybody is on the sell side, then there’s no one left to sell, everybody has sold, so what do you have to do? You have to buy, and that’s just the basics of supply and demand.

What I’m trying to do with this video is, number one, share with you a little more insight to the gaps, and then the market overall breaking all-time highs, but it’s not really the full market, it’s just the S&P has broken all-time highs

If you look at the Wilshire 5000 you can see we’re still not all the way up at breaking all time highs, if you look at the down jones, we are breaking all-time highs, so this one is moving, but the down is only 30 stocks, it’s not one that I really care to pay attention too much, and what do we do it on? What do we break it on?
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Very weak volume, it’s below the average, Then again, that has me a little bit more concerned, and if you look at the other ones like the IWM, or the RUT, you can see that again, they’re not there yet.

Those are some things to consider and I just want to put some level thinking in the back of your mind, rather than thinking about what is the TV pumping, all-time highs, what is the CNBC saying? What are all these people on twitter saying?

Just because it’s breaking all-time highs, doesn’t mean you have to buy into it. You can respect the price action, but be humble about the move at where it’s at, at what extended levels it’s at?
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Because when you look at this S&P, it’s quite bit extended right there, and if you take a look at the weekly chart, we’re way beyond the Bollinger bar as well on the S&P 500 and to me it just puts a little bit more of a caution take on the whole thing rather than euphoric state.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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