Market Analysis

Trading Corrections

Markets have been so void of corrections for so long it’s no surprise most people are a bit rusty on how to navigate through the jungle. Recognize that the rules have changed for now. Where before every single dip was bought now rips are being sold and volatility is raging up and down through price ranges while bears and bulls duke it out.

Still, heeding the signals, participants can take advantage of the price movement in both directions. Don’t get me wrong: This is easier said than done as nobody will ring a bell at either the top or the bottom of a move. Direction can change at any time as we saw at the top of the price range this week as Jerome Powell’s words caused a spike in the 10 year and stocks sold off hard in response.

Still, heeding signals the new trading environment offers great opportunities:

Today then I want to just highlight a few key observations that proved to be extremely relevant during the last week and greatly aided in identifying both short and long set-ups.

Last weekend I expressed apprehension about the magic price advance in the last hour to save key MAs:

“Not a healthy picture from my perch.…and price may find itself pressed against trend line resistance again in short order:

What say you Mr. $VIX?”

The message: $VIX was on the hunt for gap fill, the question was which gap would fill first as I outlined in $VIX Charts.

There were plenty of clues that suggested price would run into resistance and set up for a price retrace or reversal and reading these clues provided an opportunity to fade strength.

Early in the week we indeed got a ramp into the upper $SPX trend line that also produced the most overbought readings on $NYMO in 2 years:

And indeed price rejected hard after poking above the trend line.

How far could this retrace go? Easy to say with the refit of hindsight of course, but Mella gave everyone a fair heads-up warning:

She even gave a specify target:

Which then was hit:

This was then a clue to change the directional outlook as key pivots and support levels were approaching suggesting a bounce was coming.

In this context then it’s worth observing what markets are actually doing technically. Here’s a view of the $ES with relevant fib levels:

This is actually a fascinating chart as this week’s highs measured against the February lows now line up key points of support and resistance with various fibs. Indeed the initial bounce this week came on the .50% fib tag, the bounce before died at the .236 fib and you can see this alignment of price versus these pivots throughout the past 3 weeks (as marked with grey boxes).

Friday the 2 hour chart became oversold as it hit 2650 support and, along with the $VIX gap fill and Mella’s 25 target hit, suggested a bounce was in the offing and markets obliged with a nice 40 handle bounce off of the lows.

Where did the bounce stop Friday night? Right at the .382 fib. Pretty cool eh? 🙂

This chart above demonstrates how technically markets continue to act.

Now what?

Again we see a highly bifurcated market..

Again tech bounced strongly:

Yet again the boarder market did not. $NYSE for example closed below all the key MAs again:

I’ve outlined some negatives that markets need to overcome in the days and weeks ahead to repair the damage ( see Junk and Broken).

As long as Friday’s lows hold $ES has the opportunity to test some of the fibs above (using last week’s highs and lows as reference):

Speaking of these fibs, and perhaps this will pique the interest of bulls: Last week’s price range left an interesting mathematical consequence. Look at these fibs again with a view expanded to the 1.618 fib. Guess where that is:

Precisely at the January highs. Cute.

Wouldn’t that be something else? After all March and April have very positive seasonality so perhaps bulls will launch a strong rally. We shall see. For now any rally remains suspect as technical damage is evident across many charts.

Bottomline: Corrections are a process of price discovery with vastly increased volatility which makes participation more challenging, but, with a keen eye on technicals, flexible traders can navigate through the storm and identity positive risk/reward in both directions.

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All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.

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