Market Analysis

Weekend Charts: Bounce, Now What?

‘Keep it simple stupid’ (KISS) Mella always tells me, especially the stupid part πŸ™‚ Hey, turns out you can teach an old dog new tricks. The simple part of the equation over the past 2 weeks was to listen to the oversold readings and wait for the bounce to unfold. Last weekend we discussed the double bottom scenario and its likely implications:

“Should the current double bottom on the $ES hold there are plenty bounce targets above to consider including the fib zones, gaps and various MAs, including the 21MA.”

What did we tag on Friday before retreating? The 21MA:

Keep it simple stupid indeed.

After a steep “V” bounce of 6 days straight up the question is now what?

Since probably most people are no longer used to trade corrections let’s have a look at some key corrections in the past as they clarify an important point: None of the action is unusual so far, in fact it’s perfectly technical, but it highlights an important consideration: Is this correction over and we’re off to new highs or is a bear market to emerge with lower prices? Ironically the answer may be irrelevant for some time to come.

The charts of markets past suggest to me to keep an extremely open mind here and simply focus on the technicals and price action.

Firstly note a break down from highs to the 200MA and then to 21MA has been seen before:

This is the infamous 2000 topping process. While the crash was mostly immediately focused on the $NDX the $SPX played a multi month game of 200MA bounces following the March top and made intermittent lower highs in the months following. It wasn’t until September when the 200MA finally broke as support and became resistance.

The message: Stay flexible and go with the flow. Plenty of up and down action to be had.

The 2007 scenario:

Quick correction into the end of February, then a rip above the 21MA, which then became support, and off to new highs before a retest of the March lows in August following a nasty summer correction. Here too it ended up producing marginal news in October before it all started falling apart with a sequence of lower highs.

The message here as well: Stay flexible, but watch for the 21MA to become support for a run at potential new highs.

Another scenario of interest, 1998:

Here the initial drop to the 200MA also produced a bounce into the 21MA that was rejected and then new lows followed. The 200MA became resistance and then a double bottom was produced in forms of a new low with a positive divergence and markets then proceeded to rally until March 2000.

The message here: Without a sustained move above the 21MA markets are at risk of making sizable new lows before a larger rally can ensue.

Frankly, I’m open to all scenarios here.

On the bullish side I refer you to a chart Mella posted this week:

Her chart turned out to be a great signal to buy weakness in pre market this week as market proceeded to retrace to the 2630 zone and the subsequent rally into 2760 made for a great move.

But Mella is also highly aware of the resistance side of the charts and Friday’s highs stopped not only at the 21MA, but at key channel resistance:

Hence the next few days could be quite critical in determining the next larger move. Bulls need to sustain a move above the 21MA or could face prospects of new lows still to emerge.

Some factors to consider:

Firstly, keep a close eye on the factors I outlined in Correlation Watch. Stocks are not moving in a vacuum. There are many larger factors at play.

Many charts have experienced technical damage and are at risk of triggering bearish patterns.


$JNK has broken a key trend line and has merely bounced back to the break zone so far:

$SOXX: Could be sporting a larger H&S pattern:

$RUT: Broke its ascending wedge and the downside stopped precisely at the .382 fib. Has room to bounce higher, but its volatility index could suggest that retest of the busted trend line could bring rising volatility back again:

Indeed we see a similar potential scenario on the $VIX:

Surely a 6 day rally was nice for anyone that bought in long, but so far all we have seen is a market follow a historic script. It still has yet to reveal its full intention here. From my perch bulls need a sustained move above the 21MA to tackle the open gap at 2850, and sellers need to crack support back below the 50MA for a renewed attack of the 200MA.

But if history is any guide we will continue to have plenty of 2 way action and volatility in 2018. Flexibility is also a position and perhaps the best one to adopt and maintain.

Related Reading: This Week On NT

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1 reply »

  1. Thanks for the charts and commentary, Sven!
    I don’t like 2754.50 top in ES for technically being a ‘poor high’, especially rejected on ‘news’. Thinking it’s likely to be repaired and exceeded, towards 2780 area.


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