Talk about a shift in sentiment. People were getting BEARISH last night. I saw people who were even still all bullish this weekend turn bearish and one could smell the fear coming in and they kept selling in after-hours. That surprising 10 handle drop into the close created the conditions that I had outlined during the day as a likely entry opportunity for a long trade by pushing the $SPX into 50MA territory on the third day. I had set 1968$ES as my 2nd scale limit buy and we very close, but not quite. It happens, but still I’m pleased with the first entry we entered (1972.25) plus we had scaled nicely into $TF. So in short: I scaled out all my shorts throughout the day and flipped long by the end of the day.
Why the complete shift? Well simply because of the shifting risk/reward and the positive divergences that started to appear. Let me walk you through the key considerations:
Firstly we have to acknowledge this has been a violent and extremely steep decline. In essence the entire move last week has been revealed as manufactured nonsense and was completely reversed in pretty much a straight line:
Sentiment had shifted and per yesterday’s write-up we saw massive outflows as measured by some of the internals. Speaking of sentiment anyone check the fear and greed index lately?
But here are my chart based arguments that make a sizable bounce likely for at least a day or two:
The $IWM is wildly oversold and stretched to the downside. It makes little sense to push the downside here without a bounce first:
In addition, the structure we have been observing calls for a sizable bounce on day 3. In the case of the $DJIA we saw a 61.8% retrace on day 3 and 4 which in the current environment could imply a bounce of 200 points or so. Hard to see in the chart, but the equivalent would be a move to 17229 or so:
In the structure this bounce then set up for the corrective move to the 100MA. Now there is never a guarantee that this move plays out exactly, but so far, the structure still follows the script tightly.
On the $SPX we can observe several key measures that point toward the increased likelihood of an imminent bounce:
Firstly, note the $NYMO is back at -71 close to its most oversold in 2014. It can go lower of course, but it is pretty steep. Next note that the USHL and the net adds actually show a positive divergence and improved over Monday. This fact is also confirmed by the $NYAD which shows a vast improvement in relative internals:
None of this makes me a bull of course, but just an opportunistic trader. Can I be wrong here? Of course, but it’s about risk/reward and set-up and to me it says we will likely see an effort to reconnect to the daily 5EMA at least and the 8MA as well before turning lower. It is green Wednesday after all ;-). At the time of this writing we are seeing a bit of a bounce in futures and my positions are in the green. This does not mean we cannot see further weakness ahead of market open. If we do I’m inclined to expect longs, but I am staying lightly committed here and the gains this week have been substantial so there is no need to push the envelope, but rather watch he data and analyze the flow of this corrective move.
On the flip side of the argument I’m keenly watching the $VIX as it has indeed confirmed the previous structures:
If we do see a bounce here then a renewed retest of the 200MA may be in the cards hopefully coinciding with the 5EMA/8MA test I was referring to. This then could provide the necessary alignment for a renewed short.
Fun times 😉
Roadmap today: The $ES is in a declining channel and it points to a downside target of 1960/61:
If we break last night’s lows this is the where I would look to add long aggressively. If we have seen the lows then I will look to basic Fib levels in combination with the daily MA reconnect levels as a guide to scale out of longs and re-position short on a sell signal.