Why S&P 500 ETFs Rare Triple ‘Gap Ups’ Isn’t a Buy Signal

The recent remarkable rally of the SPDR S&P 500 ETF, commonly known as SPY or Spider, was a rather rare occurrence, a feat that has only happened three other times in the thirty-year history of the ETF's existence. However, historical patterns suggest that this rarity may not necessarily translate into a bullish outlook, as there's a significant possibility that the SPY could encounter a period of weakness in the upcoming weeks.

‍

Jonathan Krinsky, a technical analyst at BTIG, has highlighted an intriguing phenomenon: the SPY concluded the previous week with three consecutive "true gaps" higher. A "true gap" in this context refers to a situation where the intraday low of a daily-charted instrument is higher than the intraday high of the preceding session, leaving an unfilled space in the chart.

‍

To illustrate, the low for the SPY on Friday reached $433.01, a level that was 0.5% above Thursday's intraday high of $430.92. In a similar manner, Thursday's low at $426.56 was 0.7% higher than Wednesday's high at $423.50, and Wednesday's low at $418.65 exceeded Tuesday's high of $418.53.

‍

Since SPY's inception in January 1993, it has only witnessed three straight gap-ups on three other occasions: the three-session streaks concluding on March 13, 2019, October 12, 2020, and March 31, 2023, as per BTIG's Krinsky.

‍

Among these instances, the one that most closely resembles the recent situation was the 2020 triple gap-up, where the final two gaps left at least 0.3% of space in the charts.

‍

What followed after the 2020 triple gap-up was a three-week decline, during which the SPY experienced a drop of as much as 7.3% to reach a five-week low of $326.54 on October 30, 2020, before resuming its rally.

‍

On Friday, the SPY initially surged by as much as 0.3% after the market opened, only to reverse course and register a 0.1% decrease in afternoon trading.

‍

Following the 2019 triple gap-ups, the SPY traded sideways in the following weeks, with a low point of $279.04 on March 25. This marked an 0.8% dip below the closing level of the gap-ups.

‍

Similarly, after the 2023 triple gap-ups, the SPY fluctuated within a relatively narrow range for approximately six weeks, with the lowest closing point of that range recorded at $404.36 on April 26. This figure was 1.2% below the conclusion of the gap-up streak.

‍

Krinsky emphasized that a sample size of just four triple gap-ups over three decades is statistically insignificant, but it does underscore the extraordinary nature of the market activity observed last week.

‍

Many analysts and chart enthusiasts hold the belief that price gaps in charts will eventually be "filled," meaning that, at some point in the future, the charted instruments will trade at prices that bridge the gaps.

‍

While Krinsky's research has shown that not all gaps are necessarily filled, he holds the view that all three of the recent gaps below will be bridged before those above the current price range are filled.

‍

The first price gap above the current prices is the one existing between the low of September 20, 2023, at $438.43, and the high of September 21, at $435.97. Beyond that, another gap lies between the low of September 14, at $447.71, and the high of September 15, at $447.48.

‍

This implies that Krinsky anticipates the SPY to trade at least 3.7% lower than Friday's closing price of $434.69 before embarking on a 2.9% rally.