The selling on Wednesday ran stops and set up to test the first of three nearby gaps that exist in the SPY. Up-gaps represent irrational exuberance and down-gaps represent irrational fear. Usually the market will go back to test the validity of these snap decisions. The testing process, sometimes called “backing and filling,” is how the market builds a solid foundation for its stair step advance.

Yesterday we predicted that “despite the intensity of the selling pressure in the last hour, we expect the first gap level to hold for the time being.” Lo and behold.

This is Wednesday’s chart showing the 3 gaps:

http://www.spearreport.com/update/10.21.09_SPY.gif