Market Rebounds As expected after 6-Days in a Row of Selling

So this would be under market technicals. We haven’t gotten there yet. It would be under “understanding the stock market.” You can read more about this on-line and/or ask ChatGBT about it. Here’s what it comes down to.

GAPs provide the most reliable support/resistance lines in the stock market. There’s a theory that suggests that all gaps eventually get filled — though that’s hardly true and when it does happen, it’s often due to a massive crash that just coincidentally fills gaps from years past.

But the general idea that the market tends to gravitate toward gaps is true. And if a gap fill is within distance, that’s where the market will gravitate.

A gap is created when a stock or index opens far above its previous closing price or opens far below its previous trading price. So for example, the QQQ closed yesterday at $510.23 and opened today at $513.35. The low today was $512.35. So there’s a $2.12 unfilled gap created by today’s sessions.

Gaps are generally disliked by the market as it means no trading activity at all occurred between those two price levels. The bigger the gap, the more likely it is to be filled.

There are multiple different types of gaps. There are runaway gaps, breakaway gaps, exhaustion gaps and common gaps like today.

Certain types of gaps are less likely to be filled. For example, during Nvidia’s hyper growth period in 2023 and 2024, there were quarterly reports that sent Nvidia skyrocketing on a runaway gap to new highs. Those gaps are never going to be filled. Because Nvidia was undervalued at that point and a fundamental shift put it on a new course.

Then you have breakaway gaps — where are a little different — a breakaway gap happens when a stock or index gaps-up above a key line of resistance or down below a key line of support. This happens all the time. For example, when the QQQ was at $500, I believe that’s how the QQQ ultimately ended up breaking out. Those gaps often do get filled.

Then you have exhaustion gaps that occur at the end of a long run. Where the market is clearly overbought/exhausted and there’s one last hurrah. We get a big gap-up after a long run and investors mistaken it for another runaway gap but it’s just exhaustion.

Every gap has a “upper gap-line” and a “lower gap-line” and they tend to represent a lot of support and resistance lines. That’s because below the upper gap-line you start to have a large number of people who lose their. Imagine anyone who bought ahead of the election for example. They’re still in the green if they’re long. But once the gap starts to get filled, they’re no longer green. This is often why gap lines often create a lot of support and resistance.

Support/Resistance lines aren’t all that difficult to spot and most investors are looking at the same exact things. Support and resistance lines are determined by prior trading.

For example, look at the Nvidia chart above. It’s clear that $144 plays a heavy support/resistance line for the stock. Why? Because every time Nvidia has gone north of $144, it has come under heavy selling pressure with $150 being the ultimate resistance line. Each time it touched $150, it sold right back down.

On the other side, Nvidia has strong support at $132. Note the number of times Nvidia visited $132 and then experienced a surge of buying interest. Even those days where it briefly fell under $132, look close at the chart. You can see nothing but heavy buying below that point. So even though Nvidia briefly fell to a low of $126, it was being bought up during that stage. Just like it was being sold above $144 and as it approached $150.