How many stock market bulls got blind-sided by the 188-point drop in the S&P 500 Index?
Based on how bullish the media was going into May, probably quite a lot:
CNBC: Sell in May and go away? Maybe not this year (May 1)
WSJ: Sell in May … never mind! (May 1)
Seeking Alpha: Don’t be swayed by ‘sell in May and go away!’ (May 5)
In the big-picture context, recent losses are minimal, but those who came fashionably late to the bull party are probably wondering: Is it time to cut losses?
Based on a simple indicator, the S&P 500 SPX, -1.00% is likely to rally back to minimally 2,851 points. Why? There is an open chart gap at 2,851.11. What is a chart gap?
A gap is empty space between two price bars. Gaps, especially those created by falling prices, are like magnets for price. In fact, over the past decade, every single gap lower has been closed eventually.
The dashed purple lines below highlight some of the more recent glaring S&P 500 chart gaps.
Although this article focuses on S&P 500 gaps, the same concept applies to other indexes like the Dow Jones Industrial Average DJIA, -1.05% Nasdaq COMP, -1.00% Russell 2000 RUT, -1.18% and the corresponding ETFs.
Two major gaps created by the last two big corrections were a good indication that stocks would come back.
As the chart above shows, the S&P 500 left a gap in the initial stages of a 11.8% drop Jan. 29, 2018, at 2,851.48. That gap was closed Aug. 6.
The S&P 500 also left a gap in the initial stages of a 20.2% decline Oct. 3, 2018, at 2,921.36.
This gap was one