When bottoms fail, markets can crash. So any time we see the makings of a bottom setup at the lower reaches of what is potentially a big top pattern, it’s time to be vigilant. If support breaks, shoot first, and ask questions later. If the market reverses after breaking support, creating a false breakdown, I consider the cost of re-entry at a higher price an insurance cost. An alternative would be to go out and buy protection with puts. Whatever we do, it’s a risk. That’s trading, right?
For those of us who are short, we also have to be flexible and nimble,
So here we are. Let’s look at the 4 hour bars for perspective. We’re right at the bottom of this ominous pattern going back to mid April on the ES fucutures. If this doesn’t hold, it could start a step down process where the red horizontals are the steps. Or it could crash right through those to the first significant support level around 3970, to start. Because we could very easily see a V launch out of this. It would not take long to get back to the top of this meat grinder range.
The 4 hour basis oscillators at the bottom of the chart, represent a nonstandard time input for MACD, momentum, and True Strength. They suggest that a cycle low is at hand, or at least near. But this again is the danger. When setups like this break down, crashes happen. Not all the time, but that doesn’t matter. Once is enough to wipe out a trading account.
Our usual hourly view also suggests 5 day cycle bottoming, with a projection of 4102 having been hit. Indicators have turned up, creating positive divergences. On an hourly basis, these presage a rally most of the time, but again, not all the time. The challenge for the market here at 6:30 AM NY time is to break the downtrend lines at 4130 and 4145. Do that, and we’re looking at a likely upside reversal. On the other hand, break 4104, and it could be Crash City.
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