To understand the idea of gap filling in today's scenario, what typically happens (let me use the past as an example and you can insert the HFT firms to replace market makers/Specialists ) is that market makers on the NASDAQ and specialists on the NYSE hold inventory as they are the other side of the trade of last resort by law if you place a market order, so they hold inventory at levels usually close to the close, when we get a surprise like the Chavez peace deal offer like today, it's information that they couldn't discount, if they knew, they'd let go of the inventory and go naked short (they are allowed to go naked short for providing liquidity by law-we can't and neither can anyone else). So here comes the news that drops prices on an asset like gold or silver or the ETF's, they just lost a lot of money, to get it back they need to fill the gap and usually when they do, they'll discount the event at that point, so that I think is what is happening in GLD/SLV/USO. In the market the same is true but in reverse, if they didn't hold enough inventory at closing prices and the market jumps, they lost out on the move, so they'll try to fill the downside gap and accumulate inventory and the market will rise again.
This happens when there is surprise news and the world is full of it these days.
I also think that the initial market reaction to Hugo's plan was a knee jerk reaction and the realities are starting to sink in, there may be some re-thinking of the plausibility of such an outlandish solution, it doesn't matter if the Arab League backs it, if the rebels (which in Libya are tribal and have long standing grievances) won't accept it and if the world community (i.e the UN-NATO-the US) have already made up their mind on Gadhafi's fate, then it doesn't matter so I think there's a little re-thinking going on. Traders are always quick to move in situations like this, especially on the sell side-shot first and figure out the rest later.
Here are the charts.
GLD
This morning there's a positive divergence right off the open, this suggests to me that locals are trying to fill that gap and thus far that's what they are doing for the reasons mentioned above. The inventory and leverage they work on are huge so even a few cents can be tens of millions of dollars.
The longer view of GLD-remember we've been looking at this thinking there's a false breakout here, DZZ an ETF short on GLD is on the trade list as of yesterday (long). The short term gap fill and the longer term perspective can be two very different things.
Here's the break or false breakout in GLD that the charts have been suggesting, below the trendline (today) was the trigger for DZZ or short GLD, after the gap is filled, we'll see what the intensions are, there could be a very fast move down.
SLV
Once again, short term there's a huge positive divergence off the open suggesting the locals are trying to fill the gap and that's what has happened so far.
The 5 min chart is still negative, so after the gap s filled, we may see a resumed move to the downside, we need to watch, but this could take some time to fill the gap and then reset the inventory to the downside... Hopefully enough time for 3C to give us a clearer picture.
The hourly chart in SLV is negative just as the above chart is so I think it was going down, but inventory is crucial to the locals and they can't afford to have not been in position when this happened, thus the gap fill.
SPY
SPY showing a 1 min negative so there may be some re-thinking of the viability of the Chavez initiative.
Note that the SPY has hit the first target I mentioned yesterday, the second is a marginal new high which I'm thinking may serve as a false breakout-bull trap. We'll also have to see if the weighted stocks like AAPL see accumulation or not and see if the Fed is getting involved here, calling on the Plunge Protection Team.
USO
USO is simply reacting to Chavez, the gap has been nearly filled and there's a negative divergence, so we may see some herd like mentality on a sell off, but I still think the intermediate path is higher.
And the 60 min USO chart shows confirmation of the uptrend, so this is still bullish for USO, we'll have to watch for any changes filing through the short to intermediate term 3C charts to see if there has been a real shift in sentiment or what I think is more likely a knee jerk reaction. If retail wants downside, the locals will give it to them and gladly accumulate at lower prices, remember, these professionals are operating on a much longer time horizon then the average trader- for one reason they have the discipline, the second reason is that they can withstand the drawdown when they know they've already rigged the game. You could too if you knew what the ultimate direction would be because you fixed it already.
OK, those are my thoughts, you see the charts for yourself though and may have your own thoughts and they may be correct. I'm always eager to here your opinions as well.
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