The recent rally of the SPDR S&P 500 ETF (SPY) has drawn attention due to its rarity. In fact, this type of rally has only occurred three times in the past 30 years. However, despite the excitement, history suggests that this may not necessarily be a bullish sign. Analysts are predicting that the SPY, also known as Spider, could experience some weakness in the coming weeks.
Jonathan Krinsky, a technical analyst at BTIG, has highlighted a significant observation regarding the recent rally. The SPY concluded the previous week with three consecutive “true-gaps” higher. A “true gap” refers to a situation where the intraday low of an instrument’s daily chart surpasses the previous session’s intraday high, which results in an empty space on the chart.
Let’s examine the numbers: on Friday, the SPY experienced a low of $433.01, which is 0.5% above Thursday’s intraday high of $430.92. Additionally, Thursday’s low ($426.56) was 0.7% above Wednesday’s high ($423.50), and Wednesday’s low ($418.65) exceeded Tuesday’s high of $418.53.
Since its inception in January 1993, the SPY has only encountered three other instances where it had a streak of three consecutive gap-ups. These streaks occurred on March 13, 2019, October 12, 2020, and March 31, 2023, as confirmed by BTIG’s Krinsky.
Comparatively speaking, only the triple gap-up in 2020 closely resembles last week’s rally, with the final two gaps exhibiting at least 0.3% of space on the charts.
However, it is valuable to note what transpired after the gap-up streak in 2020. A three-week selloff followed, resulting in the SPY plummeting as much as 7.3% and reaching a five-week low of $326.54 on October 30, 2020, before resuming its rally.
Keeping this historical pattern in mind, it is interesting to observe that on Friday, the SPY initially rose by 0.3% after opening, but later reversed course to be down 0.1% during afternoon trading.
These developments raise important questions about the future performance of the SPDR S&P 500 ETF. While the recent rally is undoubtedly intriguing, analysts suggest exercising caution as the possibility of a subsequent weakness cannot be ignored.
The Significance of Price Gaps in SPY Trading
After experiencing three consecutive gap-ups in 2019, the SPY (Standard & Poor’s 500) index entered a phase of sideways trading for several weeks. On March 25, it reached a low point of $279.04, which was 0.8% lower than the closing price of the last gap-ups.
Similarly, following the triple gap-ups in 2023, the SPY remained within a relatively narrow range for approximately six weeks. The closing low during this period was $404.36 on April 26, which stood 1.2% below the end of the gap-up streak.
While four instances of triple gap-ups over three decades may seem statistically irrelevant, market analyst Krinsky believes that it highlights the rarity of the recent price action.
According to many chart watchers, price gaps in charts are expected to be “filled” eventually. This means that the prices will trade at levels that bridge the gaps at some point in the future.
Krinsky’s research suggests that not all gaps are filled; however, he anticipates that all three gaps occurring last week will be filled before any above-current-price gaps are filled.
The first price gap above current levels is observed between the low of $438.43 on September 20, 2023, and the high of $435.97 on September 21. Furthermore, there exists a gap between the low of $447.71 on September 14 and the high of $447.48 on September 15.
Based on this assessment, Krinsky predicts that the SPY will trade at least 3.7% below Friday’s closing price of $434.69 before witnessing a 2.9% rally.
