Trend Check with Tushar Chande

Do Large Down-side Gaps In Leadership Stocks Point to Start of Mini Correction?


A change in sentiment is now evident, as profit-taking has opened up down-side gaps greater than 10-day average true range in the charts of key leadership stocks (such as Amazon and Coherent) starting a mini correction as measured by the Guggenheim Equal Weight ETFs: in the short-term only 4 of 9 equal weight ETFs are long, two are flat and two are trending lower.  The data are summarized in Chart 1.  Two sectors, Industrials (RGI) and Health Care (RTH) are in short-term down-ternds.  Two, Materials (RTM) and Technology (RYT) are flat.  Energy (RYE), Consumer staples (RHS), consumer discretionary (RCD),  financials (RYF) and utilities (RYU) are long.  Thus, a mini-correction has emerged.

Chart 1: A change in sentiment is visible over the short-term in the Guggenheim Equal Weight ETFs. Two are flat, two are short, and only five are long. (For details of the trend-following models, see here.)


Scan Code for Down-side Gaps

I show the two lines of code needed to find large down-side gaps.  This follows up on my previous post on large up-side gaps.

[type is stock] and [sma(20,volume) > 40000] and [Country is US]
and [today's High <  [yesterday's Low  -  yesterday's ATR(10)] ]

The first line just limits the scope of the search. The second line says that today's high should be lower than yesterday's low minus the corresponding 10-day average true range.  In other words, we are looking for a large gap. The results for a typical search are in Chart 2 below.  I show the chart for Coherent for completeness in Chart 3. Observe how the sell-off in early June was orderly, and then Coherent made a new all-time high. However, there was a change in sentiment recently, and a rush to the exits opened up a large down-side gap.

The downside gaps are also to be seen in ABC, AFLYY, AVY, CENX, TTEK to name only a few. 


Chart 2: A search for large down-side gaps found Coherent, a leader in the rally since November, 2016 (see below).


Chart 3: The large down-side gap points to a change in sentiment as many headed for the exits at once.  Notice how Coherent has performed exceptionally well since last November.


Index Weakness Vs. Dow

I had pointed to a weakness in key indexes versus the Dow 30 at the end of last month.  John Murphy wrote about the relative strength in Dow in a post that suggested that relative weakness in S&P 500 versus the Dow occurs  in or near corrections.  We now have enough data to see the relative weakness in the other key indexes versus the Dow in an RRG chart.  Here the Dow is the reference, and key indexes varying from the $SPX to $RUT are all weaker over the past few days.


Chart 4: Using the Dow 30 as the reference, it is easy to see that the $SPX, $COMPQ, $SML and $RUT are all weaker over the past ten days.  I had discussed this weakness at the end of last month.


Yardeni Research Report Points Effects of Economic Surprise Index

A very interesting chart in the latest Yardeni Research latest report (Stock Market Indicators:  Fundamental,  Sentiment and Technical, August 2, 2017, plots the deviation of the S&P 500 index from its 200-day moving average (in percent) versus the Citigroup Economic Surprise Index.  Currently, the S&P 500 index is well above its 200-day average and the Surprise Index is below zero, about -50%.  So, either the surprise index will have to rise and become positive, or the S&P 500 index will have to slip below its 200-day average.

For reference, the surprise index was below -100 in 2008 and 2011. So this divergence is another odd occurrence that should be monitored in the months ahead.  This Yardeni booklet is a very interesting reference if you have some time to look through it.



A few cracks seem to be appearing in the rally as leading stocks gap down under profit taking pressure.

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Tushar Chande
About the author: , PhD, MBA, is the inventor behind an impressive collection of technical indicators, including the Aroon and Stochastic RSI. He has written several books, holds both a PhD in Engineering and an MBA in Finance, and has over two decades of experience trading the financial markets. Follow Tushar in this blog as he highlights his new "Trend Meter" indicator and shares his analysis of current market conditions. Learn More
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