Overnight traders tested both ends of yesterday’s range and got nowhere. So overnight inventory is balanced and we will open in the middle of the range. Keep in mind, we are at the top of the current trading channel on the daily chart. We could dip just a bit and continue to ride the channel up. Or, maybe not.
When we got to this same point in July, we dipped only slightly and then went sideways for nine sessions in a trading range. That ended up giving the channel a chance to rise above price. When we finally broke out of the range, we rallied back up to the risen channel line before we started into the 40-day cycle low.
A more serious liquidation break is not out of the question either. A double top is even a distinct possibility. But given where we are in the cycles, a decline of any magnitude we would have expected just completed. Another one is not expected until mid-September. That one would be more serious, given it connects to the larger 80-day and 20-week cycles.
To commence a serious decline now would mean that the peak of the next cycle is early, and that portends an even more serious decline. One would think a more serious decline is in the cards – but we know how well that has worked lately, right?
Likely, the market is eating time off the clock waiting for Friday’s speech by Chairman Powell after the Jackson Hole Fed meeting. Some of my cycle projection work would allow the market to form a new channel on top of the current one, essentially doubling the height of the current channel. In other words, where we are now would be the lower half of the new channel. The current channel is about 80 – 100 points high so that you could project a move up to 4600-4650 in the most bullish, blow-off scenario.
In any such scenario, beyond the sheer insanity of the climb, I would be concerned both about the distance and amount of time that has passed since we tagged the 200-day line or even some price in its neighborhood. I would be doubly concerned about the speed and magnitude of a liquidation break from the ultimate peak. We are beyond most historical time periods since a visit to our 200-day friend.
Use the all-time-high at 4492 as your upside reference for a bull breakout but be very, very skeptical. It could be a trap. I like yesterday’s low at 4476.25 (also the overnight low) as my starting point for shorts. But remember the July precedent, and don’t get too beared up too fast. Price action principles are just as important today as key levels. Remember, the market is opening in balance, and it may stay there, implying another range day.
A.F. Thornton