Above are the four most common outcomes of an opening gap down, as we experienced this morning. Of the four, the behavior is closest to the lower right-hand corner. We wedged into a reversal about 11:00 am EST. We have experienced a nice rally up to test the gap, where we find ourselves at this writing. The bottom of the gap (where the market opened) is also yesterday’s low and the old trendline we broke this morning. All of this congregates around 4450, a half-roundie that could provide resistance.
Whether this is true buying the dip or short-covering is not entirely clear, but it is certainly not the disaster it could have been this morning. You should be happy with some nice gains if you followed the morning plan. We breached 4441, setting up a short trade to 4430. The market wedged into that level, setting up a long trade that you should still be holding, but getting ready to exit on the current rising wedge now forming into the gap around 4450. After I exit this trade, I am done for the day.
I suspect there might have been some intervention in the markets this morning due to the global picture. We can never know for sure. Also, the global chaos is likely to hold the Fed tapering and interest rate hikes in abeyance. Kind of like bad news is good news. In any event, the sellers were unable to press their case below the morning low, and the buyers are still in control for now. We will see what the afternoon brings.
The put/call ratio is elevated and that may stymie further declines today. But until proven otherwise, we are still in the initial stages of the nominal 40-day cycle correction.
A.F. Thornton