I am struggling to adjust both from sea level back to the mountain elevation, not to mention a 10-hour time zone shift, so bear with me as I am exhausted and thus behind on some of my detailed charts annotating. I will have them later today.
Yesterday confirmed that the market has a tinge of normalcy left, as we finished the fifth down day in a row, broke the very short-term trendline, and bounced from a logical and important support zone. By the way, we might have just experienced the first consecutive five down days since the March 2020 China Virus crash.
Support came from the gap and breakout area of the three-month consolidation from March to June in the S&P 500. So you have to ask yourself, what (if anything serious) has the market violated here?
The answer is nothing yet, other than a retest of the last breakout coinciding with the 50-day line. And given the spike in volume, fear, and volatility, the market is perfectly capable of moving from here back to new highs if it wants to resume the intermediate trend. We may need a retest of yesterday’s low before the trend resumes in the next week or so, but we sit on that intermediate trendline and channel bottom now.
I would expect a few days of recovery back to the 21-day line to test it as resistance now that we sliced through it as support. My main point here is, no matter our opinion, and no matter how strongly I suspect that the 18-month cycle has topped, we have to keep an open mind to all possibilities. This market frequently defies any sense of logic, as one would expect with such aggressive Fed intervention. When I have an intermediate buy signal on the algorithms, you will be the first to know.
Meanwhile, our job as day traders is to take advantage of the volatility. You do this by reducing position size and taking a bit more of a scalping approach to trades. You can already infer that yesterday’s low is now a critical line in the sand. This morning’s gap higher has buyers building on that low.
Pulling back to a wider view shows us that there is still a huge unfilled gap above us from yesterday. Opening prices are going to start the day within that gap. The market doesn’t like gaps, and gaps should fill. If they don’t, we have a When What Should Happen Doesn’t (WWSHD) moment, which gives us some important and objective Market Generated Information (MGI) to work with. Failing to cross the overnight high (ONH) today would be a sign of weakness.
Given the size of the gap above us and the fact that overnight activity filled very little of it, and we are currently well off of the ONH, it tells me that short covering may be already on the wane. Yesterday’s regular (RTH) session can be a very different animal from the overnight one, but those are the initial impressions.
Gap rules are in play for today’s session. The overnight inventory is 100% net long, so we know what should happen in early trade, which would be the corrective move. Early trade will tell us a lot about the nature of the short covering in the overnight session. A lack of early fade will mean that buyers are not done, and we should bias long, monitoring for continuation as we go.
Note that the ONL and settlement are almost identical, around 4254. That means that once all overnight longs are relegated to the “wrong” column, screens will go red around the world as well. I would bias short below that level. The RTH Low (4224) was poor yesterday and should be carried forward for a potential further short trigger as it needs to be repaired. I could argue that it is a weak low because it was a bounce from the 50-day line – a nuanced level for short-term traders.
Good luck today,
A.F. Thornton