We are waking up to an ugly market this morning, and perhaps a character change if the market does not make a quick turn. I have no predictions, but the pattern we have followed from options expiration lately has been a Monday blitz followed by a turnaround into Tuesday, so we shall see. All references below are to the S&P 500 continuous futures contract, which is our market proxy.
They say in the land of the blind, the one-eyed man is king. We had had our eye on the China and Evergrande problems before the crowd even noticed it. The Founders Group went back to a 100% cash position on September 10th as a result. The financial press will no doubt lay this decline at the feet of the China problems. But we know that the 80-day cycle dip is our culprit, and the blame game is a distraction.
So the reality is that we should be bottoming the 80-day cycle dip, which I have mentioned for a few weeks now. And even early last week, when the market attempted a one-day rally, I mentioned my skepticism about reaching the minimum price target for the decline while we still had time left on the clock. Now you can see why both time and price are essential aspects of predicting market behavior.
The market will tell us whether this is a buyable dip. We will observe the price action over the next 24 to 48 hours. Price needs to retake the 50, 21, and 5-day lines. But the lines will undoubtedly provide some resistance along the way. I am also watching the Navigator trigger line, currently showing a buy stop at 4483. We have a polarity trigger at 4455, but that is a very short-term indicator and not likely to end the correction.
We are opening at the August low at 4339.75, which should provide some support. That price is also the approximate measured move target for an ABC correction from the recent all-time high.
The character change mentioned above is that tagging last month’s low marks the first time we have a low in the recent sequence that is not higher than the previous short-term low. So that could portend a trend change to a sideways market or something worse like a complete trend reversal.
The analysis is a bit more complicated than that, however, in that the most crucial aspect is that this low is higher than the last 80-day cycle low, which takes us back to July 19th and 4262. This decline could simply be widening the price channel just a bit, leaving the intermediate trend intact. But the short-term trend is reversing.
Moreover, we are now opening well below the 21 and 50-day lines, also short-term bearish. And then there is the Fed Meeting Wednesday, etc., etc.
For this morning, then, Gap rules apply. These rules are essential, and they work.
Assume that there is potential for an early fade of the decline. Buy the high of the first one-minute bar, or buy the cross up through the open if the opening drive is lower. Monitor for continuation with an ultimate target of the Overnight Halfback at 4379.25.
An early short entry (assuming a gap and go) can be challenging to pull off. The better move will be to short the cross back down through the open with an initial fade. Or, draw an uptrend line from the first swing low of the day to any subsequent higher low. Then short any break of the trend line. Target the low of the day first and monitor for a continuation lower.
Please don’t get too bearish this morning. We are now well into the decline after two weeks. Watch the put/call ratio for an extreme to coincide with the price extreme. Also, if the ratio is above .80 into the close, look for a short squeeze.
A.F. Thornton