Daily Commentary: April 22, 2024

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Don’t Trust Gaps Up

Posted by Pete Stolcers on April 22

The market will find support and it will bounce, but we need to make a higher low.

PRE-OPEN MARKET COMMENTS MONDAY – During the last week we witnessed persistent selling pressure. This move is fairly deep and the drop has been steady. Buyers have not shown any interest yet and the series of red candles confirms that. If you look at the daily chart you will notice that there have been many gaps up… just like the one this morning. They all failed last week and the gap reversals helped to generate downward momentum. I would not trust this gap up for that reason!

The SPY is within striking distance of the 100-day MA and I believe it will be tested today or tomorrow. I would like to see a selling climax that tests it. When we touch that level, I am expecting a bounce. I don’t want to spend time at that level and I would like to see long green candles off of it on heavy volume. The most ideal set-up this week would be a big gap down Tuesday that tests the 100-day MA and an instant and violent bounce off of it. We rarely get what we want, but I would like this bounce in the first two hours of trading. Then I want to recapture all of the gap and close on the high. That would be a firm low that I can lean on and it would warrant starter long positions.

Tesla reports earnings after the close Tuesday. The stock has been badly beaten down and car sales in China are tanking. There is a huge glut of EVs there and Chinese consumers are cutting back on big ticket items in an extreme fashion. This first tech giant is not likely to spark buying, but they will focus on automated driving and the “taxi” service and AI. That should keep the bottom from falling out. META reports Wednesday. MSFT and GOOG report after the close on Thursday. I am expecting good results and lots of excitement over AI.


Short sellers will be diddling around trying to squeeze the last drop out of this move and they will regret it. The bounce will be fast and furious. Shorts will be very nervous ahead of mega cap tech earnings and they will cover. Why would they risk being short when these stocks have lead the rally? Instead of managing your exits on shorts, you should be in cash waiting for signs that the bounce is underway.

The big economic event this week is preliminary GDP. This our first (and most important) look at economic growth (2.5% expected). The PCE deflator on Friday will also be important. A week from Wednesday, the FOMC statement will be released.

SPY had a major 1OP bearish divergence Friday and we are about to get a bearish cross. Gaps up have been faded and I would not chase this gap up. If the market is able to hold the gap up during the first bearish cycle, it will be a sign that buyers are interested. You can try longs, but I would not add aggressively unless you see lots of green candles and good volume. I am NOT expecting this. The selling pressure has been heavy and the downside will be tested. The 100-day MA should act like a magnet. Support is not typically formed by gaps up, but it does happen. The more common pattern is a deep probe for support that bounces instantly. If this gap up crumbles easily with long red candles, we will fill the gap and there could be an opportunity to try some day trading shorts.

I would not personally monkey around with shorts at this level. If I had any on, I would be focused on getting out. My attention would firmly be on the bounce that is coming and I would be setting alerts on stocks that have been strong. I believe that we are coming into a turn and that we will have an opportunity to trade from the long side for at least a week and probably more. If I get this completely wrong and the bounce after mega cap earnings is a complete dud, I will exit and I will start considering shorts.

Support is at the 100-day MA and resistance is at $500.50. I would view a close above $500.50 as bullish especially if the price action is orderly and if we close on the high of the day.

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