Exhaustion gaps sometimes signal a short term top in the market and today’s market action, the gap open and sell off is almost a textbook exhaustion gap.
An exhaustion gap generally happens after an extended strong upward or downward move.
Here is how they generally work out. The market opens significantly higher than the previous day’s close and continues to rally for a short time right after the open (just enough to suck in the “dumb money”). Next, the market sells off, tries to bounce, but can’t since most of the buyers or people interested in buying have bought over the previous few days (that is why the market appreciated so strongly).
Throughout the day, the market continues to drift lower, but can’t find support until the last hour or so of trading.
If you look at today’s intraday chart it was a textbook example of this type of pattern.
What does this mean? The smart swing traders, recognizing the exhaustion gap, sold a little portion of the long positions that were held overnight and opened a few small short positions to participate in the drift lower.
My disclosure:
I held the long XLU (utilities ETF) position and XLP (consumer staples ETF) and opened a short position with the SMH (semi conductor ETF).
Mike Matousek, CMT
Portfolio Manager, ETF Updater
http://etfupdater.com
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