The consumer durables index reached a gap last Friday in the 5750 area, which can act as resistance and result in a correction of the realtively weaker companies in the sector.
 
Prices gaps are areas of severe demand supply imbalance that results in an explosive move in price. Notice the areas marked by the blue lines on the chart which identified the gap. Prices gapped on the way up and down on the index showing that there was extreme demand in the area on the rally and extreme supply on the sell off.
 
Let us look at the psychology of buyers and sellers in the gap area of the consumer durables index. As prices gapped up due to extreme demand several buyers were unable to get on the rally. However, once prices came down to the gap level these buyers saw an opportunity to get in at a cheap prices. However, prices gapped down and fell sharply resulting in buyers holding losing positions. Now that prices are back to the gap level, the logic is that these buyers may get out at break even, resulting in a drop in price. It's hence important for longs in the consumer durables sector to be cautious at this point.
 
A sell off at this point can bring the index sharply down as there are no support areas till prices reach the 4750 zone, which is a massive 1000 point drop. However, if index closes above the 5900 mark it can head higher. The breakout can take the index all the way up to the 6800 area, as there are no strong resistance zones before that level.
 
Even though gaps show areas of extremely demand-supply imbalance, the ones in the middle of a trend are not as powerful as the ones at the beginning or end of a trend. You will notice that prices gapped up in the middle of the trend and when prices came down to the gap, there was no bounce, but continuation of the sell off.
 
Trading Strategy
The longs should book some profits and move stops to the 5050 area. It also makes sense to go short at this level with a stop above 5900. In case the index falls to the 4750 area, it would make sense to go long again. Also going long on the break out of the 5900 area could work. However, it's best to wait for prices to break out and pull back to the 5900 area before going long.
 

The author is editor of www.capturetrends.com based in Chicago