It is very important to visualize scenarios. Know which one you would prefer and how you will trade it.
PRE-OPEN MARKET COMMENTS TUESDAY– Yesterday we saw heavy selling and the S&P 500 breached an upward sloping D1 trend line and horizontal support at $417.50. The market never came up for air and it closed on the low. Sellers were fairly aggressive.
The Fed is in recess and so is DC. The market gets nervous when there is no one minding the shop. You will see recycled news stories and there will be headlines that suggest the bottom is going to fall out. You can expect headlines like, “US tensions with China escalate.” Investors will worry that we are going to war with China.
Know that this is common for August. I don’t know what the headlines will be, but they will flush out weak hands. We are in a news vacuum and I have seen similar many, many times.
Longer term swing traders need to take gains on their bullish put spreads. Those trades were in great shape and I suggested reeling them in for pennies last week. I also advised you NOT to sell more. We need to see the depth, speed and duration of this market drop. There will be an opportunity to reload. It might take days, or it could take weeks. We need to gauge the price action.
Day traders our best scenario will come off of an early bounce. We will not see a decent rally until the downside has been tested and until support has been established. After a big drop the last two days, we could see dip buyers test the water. A wimpy rally with mixed overlapping candles and tiny bodies would be a gift. That price action suggests that the bounce is weak and that a good shorting opportunity will present itself. When the market tests support we want to see stacked consecutive red candles. That would be a sign that sellers are still in control and that we are going to see follow through selling. If that drop is also wimpy, it could be a sign that we are in for a slow day. The D1 technical breakdowns and the speed and persistence of the drop (brief shallow bounces) indicate that we have more work to do on the downside. Could we get a bounce and then continue lower? Yes. Any bounce that has consecutive stacked green candles on volume should be respected. The 1OP indicator is your guide. From a short perspective you want to see tiny wimpy brief bounces during bullish cycles. That means the next bearish cycle is likely to be good. During that bearish cycle you want to see stacked consecutive red candles and you want very little retracement. If you don’t get that, you have to be more cautious with your shorts because support could be forming.
Support is $410 and resistance is at $417.50.