One of the funniest movies I ever saw was “Monty Python’s Meaning of Life.” Admittedly, I was punch drunk after staying up four days taking law school finals.
There is a scene where an obese man is stuffing his face, and at the end of gorging his meal, he asks for “one more thin mint.” After swallowing it, the man blows up from so much food. It reminded me of how I feel about the market this morning. It may want “one more thin mint” before it finally blows its top.
Yesterday went precisely according to plan. It was an inside, short-covering day. The short-covering was something to behold, as it usually is. But it was almost too good. And I am reminded that an inside day is typically a continuation – not a topping – pattern.
Yesterday, every index either bounced from its 50-day line or trendline – just as the indexes should in a bull market. Not a single one of our quartet, the S&P 500, NASDAQ 100, Dow, or Russell 2000, broke the uptrend. Nor has the overnight crowd been able to drive the indexes further south in the last 24-hours. Each one of these indexes has moved across its channel, allowing for a final, higher wave – perhaps that 5th and final Elliott Wave – to take us up to complete the intermediate top.
And even the declines into Wednesday’s lows were symmetrical, three-wave or what we call “two-step” patterns. Three-wave patterns are corrective of the prior trend, not impulsive as would reflect a trend reversal. There are what we call “head and shoulders” patterns to reverse higher in both the NASDAQ 100 and S&P 500 futures this morning. I even see “V” reversals on the 195-minute charts.
Another item of significance is our old friend 4115 on the S&P 500 Futures. The level provided support for a month before we finally broke through it mid-week. It was our “balance area low,” as we referenced it the past few weeks. This prior support should now be resistance.
The 21-day line sits just above 4115 at 4130. The futures are invading that space this morning. A close above 4130 on the S&P 500 today would be significant.
A close above 4177 would save the proverbial butts of the Weekly Options Market Makers. The Weekly Expected Move low sits right at that level for expiration today. Granted, part of the breakdown Wednesday was caused by these players neutralizing their deltas by selling futures, but there might be a few of them left to help drive the market to that level.
The final underpinnings in the bullish possibility this morning are the spike in the VIX (volatility index), Put/Call Ratio, and volume on Wednesday’s lows. For the most part, these spikes are as high as we experienced around the election last year when we were bottoming the second wave of this China Virus rally after a few months of sideways action. Short-term spikes in volume and fear are associated with a low that will hold, rather than a market about to break lower.
That does not mean that the low will hold down the road. But it makes a rally more likely than a decline, at least in the short term.
If all of the above leads to a pivot higher here, we can anticipate another algo buy signal today, or more likely on Monday. And we would have to attribute the adverse action this week to a news-related distortion caused by the oil pipeline shutdown and ransom scheme.
You already know the bear case if you have been following these pages. We hit the proverbial brick wall at the current level, then reverse lower, confirming the intermediate, nominal 18-month peak.
Let me also mention another distinct possibility here. We always tend to think of rallies and declines, leaving out the distinct possibility of the market getting stuck in a trading range. If so, we would have the bottom in place now, and we would stall at the old highs and reverse lower again. We could play that ping pong game for a few months, perhaps with a final break as the nominal 18-month trough arrives about six weeks from now. Keep that possibility in your back pocket.
All of this underscores the importance of keeping an open mind to all possibilities, no matter our opinions. In one sense, I would feel better about this latest scenario, having lost some money executing on a buy signal precisely a week ago today. The signal rolled over on the news events and stopped us out Monday morning. Of course, that is why we use stops, as nothing is perfect in life or trading.
Today’s Plan
This morning we have overnight activity that has moved above the highs a bit on inventory that is 100% net long.
As we have a slight true gap higher at this point, the early session may be a tug of war between the inventory that needs to correct and the shock and awe that we are trading above the May 12th high. The morning activity will tell us a lot about the market.
Overnight activity has broken the downtrend of the last four sessions in the S&P Futures. Note that this trendline is very steep. Even with today’s gap, prices are still below the 21-day line.
Also, note the potential “V” reversal in play, and we will see if it takes hold. The measured move is the S&P 500 all-time high. Key resistance levels above are 4115 (prior support), 4130 (21-day line), and 4177 (the Weekly Expected Move low).
Sorry for the delay this morning. I am in the midst of an emergency. Check back later as I will be adding some charts to this discussion.