Sunday, December 27, 2009


Gaps are the bread and butter trade of many hedge funds. The reason being most gaps eventually get filled. It's not all that rare to see a gap on an individual stock, as company specific news creates gaps all the time. It is unusual to see a gap on the indexes as it almost always indicates extreme emotional trading by the entire market. These emotional moves almost always get erased once the market calms down.

Even more rare is to see a gap on the weekly chart. It's only happened a few times since the cubes started trading and every single time the gap filled pretty quickly. (One caveat is the very first month of trading in Dec. of 98 the Q's formed a couple of gaps that weren't filled until the bottom of the 02 bear.)

But we are hardly trading in a bubble environment right now in a brand new issue so I'm pretty confident the gap from 7 weeks ago is going to fill.

At 7 weeks this is the longest stretch that a weekly gap on the cubes has gone unfilled. The only other gap that lasted anywhere close to this was in 2001. Also and emotional period as the market was putting in a yearly cycle low. It took four weeks for the market to cool off and bounce back.

Right now bullish enthusiasm is running hot as the market nears the end of the second leg up in this cyclical bull. I'm fairly confident  that the gap will get filled soon.

History suggests this cyclical bull should experience at least a 10% correction to separate the second leg of this bull from the third. When that correction commences we are going to see that weekly gap on the QQQQ chart get filled.