A few weeks ago, on May 16, I posted about how sometimes technical analysis can help forecast market behavior. While it is not crucial for the use with my trend tracking methodology, I still like to look at patterns that have historically been repeating themselves on a consistent basis.
What I am referring to is the “break away” gap as shown in the domestic TTI chart below:
The theory is that break away gaps will sooner or later be closed. What that means is that prices tend to always come back down and “close” the gap—eventually. And that’s the rub. It’s not a reliable timing indicator as to when this will occur.
With the bloodletting of this week, I wanted to revisit the chart to see if this week’s price drop had any effect. As you can see, the pullback did not make it quite to the gap let alone close it. Today’s rebound took us (thankfully) back in the other direction.
However, the jury is still out to see if this phenomenon holds true again. Once the gap closes, we could see a solid rebound and a move back to higher territory. However, if prices move right through the gap on the downside, then odds are high that a trend reversal has occurred. Our sell stop points will approximately be triggered around the low point of the gap thereby protecting our portfolios should the slide worsen.