This is a guest post by Zev Spiro:
The gap-up in SPY yesterday can be one of two kinds of gaps. The first is a continuation (or measuring) gap, which continues the current up trend and here measures a target to approximately $132, based on the distance travelled since the previous breakaway gap (**in my 9/20/2010 Market Update 132 was my 2nd target for the SPY). The second is an exhaustion gap which would indicate, at least, a short term top. In order for this gap to be considered a continuation gap the bulls must defend the $125.86 area. If the bears can close the SPY below the $125.86 area then this can be considered exhaustion.
Until proven wrong (via a close below $125.86), I believe this to be a continuation gap. My opinion stems from the fact that many financials are breaking out of bullish patterns and there is healthy sector rotation. In addition, there has not yet been a continuation gap in this up trend which often appears in a trend before an exhaustion gap. Either way, the market will soon clarify which type of gap this is.
Below is a trade idea in Morgan Stanley (NYSE: MS), a financial name, which broke out yesterday above a major bearish resistance line, while simultaneously penetrating and closing above resistance of a 6 month base. This simultaneous breakout was triggered with both a breakaway gap and heavy volume, which both add confirmation to the buy signal.
Morgan Stanley (MS): This first daily chart of MS displays the trend line and pattern, while the chart following it will focus on money management.
Morgan Stanley (MS): Target: 32, Protective Stops: either below pivot low at $27.08, or confirmed penetration back below the bearish resistance line. Whichever stop area is lower will be the safer method.
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