Yesterday was another victory for bears, and the market is now in a price zone that crosses numerous long-term support levels. It’s also sufficiently oversold that it’s advisable to watch for a potential bounce. However, so far the decline has blown through support as if it wasn’t there — so this offers probability, but no guarantee.
I’m very interested to see what happens today, as most are expecting a “Facebook bounce.” Interesting how the Facebook IPO coincides with the fact that SPX is indeed in a potential bottoming zone according to the wave counts, and oversold according to the indicators.
Moving onto the wave counts, there are two higher-probability interpretations. I’m inclined to view this wave as the third wave of a larger third wave, but the charts do leave open the potential that the recent decline was an extended fifth. Both scenarios are currently expecting some type of bounce, possibly as soon as today, though the idealized target for either is still a few bucks beneath the current market. It’s not always advisable to try and chase the last few bucks of a move, though. As we’ll see in a moment, we’ve already captured 81 SPX points, so there’s certainly no need to get greedy here.
Conversely, I would pay close attention to the trendchannels in the chart below before getting too excited about any bounces. An “expected” bounce is not a “confirmed” bounce until the trendlines are broken, as noted on the chart.
This is where a trader has to decide whether they want to risk giving back some profit to chase a potential extended drop (by placing stops above the market), or whether they want to trade actively and take profits directly. I myself am very temped to use the first option, but my real-time read during the trading day might change that view.
I do want to call attention to the 60 point trade trigger discussed on May 2, as that trade has now captured the full profit of 60 SPX points (1305 target reached) since the trade elected at 1365. Keep in mind that this trade came directly on the back of a successful 21-point trade trigger which elected at 1394.
Thus those two trade triggers have captured a combined 81-points of the decline from 1394. Not a bad two weeks!
To wrap things up, one of my favorite indicators, the McClellan Oscillator (NYMO) has finally reached the oversold zone where larger rallies often begin. If you’ll recall, this was the same indicator I called attention to on the exact day the market bottomed back in April.
As I’ve also pointed out on a number of occasions, this is also an area that should have longer-term price support.
What happens next is absolutely critical to the bull case. A bounce looks possible, and even likely here — but the market makes no guarantees. As I discussed yesterday, bulls absolutely must hold this zone. An oversold market can be extremely dangerous if an expected major support zone fails.
If support holds here, then a quick trip to the 1320’s, or even the 1340’s, appears likely. So — be on guard for a bounce here, but stay nimble. If by any chance the 1290-1300 zone fails, I would give absolutely zero thought to holding long positions at this time. Beneath that zone and the market could easily go into free fall.
To put it simply: the next session or two represent a critical test for the bulls. I’m favoring the view that they’ll manage some type of bounce here, but also favoring the view that this bounce will be short-lived. Trade safe.
We may be skating on very thin ice here, but the weight of the evidence still supports a weak bull case for the near to intermediate term. So I’m adding buy picks on the chart pick list and adjusting trailing stops to account for the risk.
These reports are not investment advice. They are for informational purposes, for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.