Tuesday, we saw another “mini” liquidation break. On the whole, the reaction was bullish. Once again, the market sold down to the 5-day EMA and then flipped higher, which has continued overnight. We filled the most recent gap, which also provided support. Friday’s low also held, at least on a closing basis.
The day started with a downside breach of the 30-min range, supported by weak internals. Tick distribution popped below 500 for most of the morning, with cumulative ticks remaining below zero, The S&P 500 A/D line headed straight south to -400 from the open. In other words, internals supported the breakdown of the 30-minute range. The wild card was the positive NASDAQ 100 action, but a lot of that was due to one stock, Amazon. Shorting turned out to be the right move on the 30-minute breach and retreat trade – at least for the S&P 500.
I collected 29 points per contract on the day, with two fairly easy trades. First, I shorted the 30-minute breach and retreat (see chart above). This is my favorite trade when overnight action gives us no clue about the open. Second, I bought the trendline break back up (also see chart above). When the market is trending, which is only about 20% of the time, trades are a lot easier than range days.
Assisting in identifying the bottom yesterday was an expectation that bulls would buy the first pullback; we were filling Friday’s gap (gaps should provide support in a decline); we were at the 5-day EMA, which has provided support in the latest microchannel; we saw a positive momentum divergence on the low; ticks had already exhausted at -1000; and we saw fewer downticks on the final low. This is all well and good, but never anticipate the low – always wait for a true pivot.
Drawing trendlines and looking for trendline breaks also was helpful. Once you believed that a bottom was in place, drawing in your fib retracements where you are bound to encounter resistance, or even another trend reversal, also was important. Of course, watching price as it relates to the 21-period mean (green line) also helped, as did the Navigator trigger line.
By the end of the day, price was in the third push higher. After three pushes in a trend, it is best to step aside as trades in the direction of the trade get riskier. Also, I generally do not like to trade the final hour as there are often inventory and mutual fund adjustments that are unrelated to price and trend. Trading can be an art as well as a science, so if you want to take a late-day trade that is fine. I also passed on another short trade that presented after the first short in the morning. The theory on that was that pigs get fat and hogs get slaughtered.
I will discuss more in the morning outlook, but the wide-ranging price bar for July 6th should provide some new go / no-go price boundaries. If we break above the bar, the bull phase continues. Below it, you will need to grab your parachute. Also noteworthy, the value (where 70% of the volume occurred) moved slightly lower for the first time in 11 sessions yesterday. It was overlapping with Friday, so not as negative as it could be. Always remember, value is more important than price. We are trying to track where volume is allocated, as much as price. Price without volume (and time spent at the price), can be very misleading.