By: Tom Gentile
on December 13th, 2022
Today the markets saw a huge gap up in price. A gap up is when a security closed at one price and the next day opens for trade at a higher price. It’s just today’s gap up was a pretty large one.
The Cause for the Gap Up
This morning the Consumer Price Index data was released. What it showed was consumer prices, (what we as consumers pay for goods) for November rose less than expected. Even though the report came in up 0.1% from the previous month and up 7.1% from a year ago, it was less than expected. The forecast was for it to be up 0.3% from the prior month and up 7.3% from a year ago.
This report gave investors the impression that the rampant inflation taking place this year is slowing down. The thinking is if inflation cools off this will boost the markets and take pressure off the Fed, so they don’t have to be as aggressive with their rate hikes.
This gap up and higher prices were short lived. Short lived to not even lasting a full day.
The SPY gapped up, but pretty much reversed right away only to end up closing much lower on the day.
Bearish Reversal Day
Bearish reversal days happen when a security opens up at one price and then closes lower on the day. If you use candlestick charts you most likely see a red candle body. If you use Open, High, Low, Close charts (OHLC) you will see a hash mark on the right side of the bar lower than the hash mark to the left of the bar.
What this suggests is there was a lack of conviction for the stock at the higher price.
It can reverse due to news that came out about the security/stock or the overall markets or a combination of both of those that counters the reason for the gap up in the first place.
Possible Cause for the Bearish Reversal Day
The optimism and bullish price action to start the day may have been hit with the realization that even though the numbers suggest inflation may be scaling back, the Fed is still likely to raise interest rates tomorrow.
Not only will we see an interest rate hike, but it also seems expectations are for a 50-basis point hike which is smaller than the previous hikes, the tone and forward-looking commentary from Fed Chair Powell is going to just as, if not, more important and the selling could have been some profit taking ahead of that announcement.
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