Programming issues have been plaguing me since Sunday. I will get everything from yesterday back up on the website later today. Meanwhile, we exited most of our positions last week at the peak, excepting for Energy (XLE). I had set a wider than usual stop to give it plenty of room. One would think XLE would have reacted favorably to Middle East turmoil. We hit our stop about an hour before the close yesterday nonetheless. And perhaps that is one of our “WWSHD” signals (when what should happen doesn’t).
Overnight, the major indices continued lower to tag their 50-day lines. That would have been the end of it in the past few markdowns. However, in June and July, the markdowns did not finish until Monday or Tuesday after monthly options expiration. The monthly expiration is tomorrow (Friday). And we will be gapping lower this morning from the lower third of the overnight range. Overnight inventory is net short.
And the previous corrections started a few days later than this one. Of course, this markdown could be different now that we are in that seasonally weak period of the markets – August through October. Notably, as well, we have now dropped below the August monthly open at 4408, so the monthly candle has turned red, putting a potential bear monthly candle on the board.
Also, we have been in a small pullback bull channel on the weekly chart which normally ends with a large pullback of 10% to 15%. At the very least, the market typically will go sideways for a while. The only question is what the size of the trading range would be. As an example, could we tag the July 19th low around 4200 to form the bottom of the range?
Today, then, is as simple as framing our bias between the overnight low at 4347.45 (the market looked like it was exhausting into that level last night) and the overnight halfback at 4374.50. Above the halfback, I start feeling a tinge of positive bias. Below the overnight low, there are a couple of prominent VPOCS at 4339.75 and 4316.50, but it could also mean a trip all the way down to the 200-day lines, though not likely in one session.
Overnight inventory is certainly net short enough and we are close enough to the ONL to assume that there is potential for a short-covering rally. As always, buy the high of the first one-minute bar or a cross back up through the open should the opening drive be lower.
In either situation, it would be better if the ONL does not get taken out in early trade. Monitor for continuation and target the overnight halfback first. The outcome and tone of any short-covering rally will always give you tons of information that will help you discern the potential outcomes for the rest of the session.
On any fade and then failure, preferably one that cannot even reach the overnight halfback, the cross back down through the opening price is a short trigger.
On an opening drive lower that takes out the ONL, target the first VPOC at 4339.75 and monitor for continuation. Good confirmation that such a move has the legs would be a failure of the NYSE tick to get positive at all during the first half-hour of trade.
Both Gap Rules and Spike Rules apply this morning.
A.F. Thornton