The overnight action seemed downright scary with new lows being made and twitter getting super bearish and Europe falling into a 10% correction abyss. Not even bounces of note where to be seen. How to play such action? Simple. Don’t panic, and try to understand the context of the action you are seeing.

In pre-market I outlined an early morning buy case for members by noting that today would mark the 5th day in a row the $SPX was to be disconnected from its 5EMA. Very rare, making a reconnect increasingly likely.

What I also outlined were a number of positive divergences. Positive MACD divergence on the $ES versus last Friday’s low, a higher Russell, lower $VIX versus Friday, improving highs versus lows and we are seeing key indexes reaching key support levels ($SPX 100MA, $NDX 50MA, $SPX weekly 21MA)

The other issue I highlighted was the realization that this corrective move so far looked exactly like the structure in January: It is almost eerily similar as outlined in a script: Boxed consolidation, then break, followed by 4 days below the 5 EMA, with the first 2 days below the BB (i.e. last Thursday/Friday), the 3rd day a bounce (Monday), a reversal into a new low on day 4 (yesterday). If the market continues to follow that script we are likely to see a large bounce day today what would see us reconnect, and possibly exceed the 5EMA. This would then be followed by two down days with a heavy new low (by Friday). Following the script this low would be followed by an aggressive rally into the 50MA by OPEX next Friday:

Based on the premises above it was our intent to buy the hard gap down:

The down open provided a good reconnect opportunity and the target areas I outlined for premium members came to fruition within the first hour of trading:

The result? We now see the market continue to follow the January script on day 5 as well:

The scary part for longs is the potential move into day 6 and 7, ironically the typical weekly low reached the week prior to OPEX. If we continue along the analog path we could see some solid new lows by Friday this week. Whether this will play out remains to be seen of course, but if it does watch out.

The big head fake would of course be if we have seen the lows of this corrective move already this morning. As sellers failed to retain a new low this could certainly be in the cards, and based on all the noise on twitter the past 24 hours many people have been waiting to buy lower. What if they have to keep waiting? The chase could be on.

For now we closed some of this morning’s longs into the target zone run, but remain positioned for upside with stops in place. Yet the January script looms large. Either way these markets are far from boring now. Good times.