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No Market Bounce Until This
www.oneoption.com
The market has fallen hard and fast. We need to establish a hard low early in the day.
PRE-OPEN MARKET COMMENTS TUESDAY – Now the market has revealed its “true colors”. The selling pressure has been heavy and the bull market is transitioning. Buyers have been conditioned to buy dips and the first stage of this process is choppy as buyers and sellers pair off. Eventually, sellers prevail and buyers start to realize they are overpowered.
The market takes the stairs up and the elevator down. Asset Managers have very little cash (lowest level since 2010 according to a Bank of America survey) and they don’t have any dry power to buy dips. That means they will be deeper and they will last longer. After a pullback of this magnitude, we can expect a deep probe for support. I know it feels like we’ve already seen that, but that low needs to be established early in the day.
In the next few days we need to see a deep air-pocket low. Ideally the move will be steep and sudden. Stacked red candles on heavy volume will drop the market down to a level where buyers are interested. Off of the low for the day we will see a massive green bullish engulfing candle on heavy volume. We never bite on a single long candle because it could be a solo. When we hit that low we will see two or more consecutive long green candles. Anything less is NOT the pattern. The buying from that point on will be relentless and it will be non-stop. All of the losses for the day will be erased and the market will fill any overnight gap. A day or two later there will be an after shock. It will try to get back to the low, but that attempt will be quickly thwarted. That is when you know a snap back rally is likely.
During bear market cycles, these bounces can be violent. We don’t know how high they will go or how quickly they will end. We are trading against the trend and it is best not to trade these bounces. Wait for the bounce to stall and find the weakest stocks while you wait. When that bounce hits resistance (technical price level) or the momentum stalls (compressed tiny bodied candles) be ready to enter starter short positions.
The market had a nasty drop yesterday and we are likely to have a day of rest ahead of a major economic release tomorrow (CPI). I would not trust any bounce today until we probe for support. From a day trading standpoint, our best odds would come off of a wimpy bounce with mixed overlapping candles and light volume. When the momentum stalls a great short will set up and then the market will probe for support. The first target would be the low from Monday. Given the CPI tomorrow, I don’t believe we will go below that level. Nice sized red candles down to that support on heavy volume would prompt me to stick with shorts and to see if that level is breached. I am not expecting that. A more likely scenario would be a test with mixed overlapping candles and I would take gains near the low from yesterday if I see that.
Expect a choppy day. Buyers and sellers will be engaged so we should see some decent movement both ways.
Support is at the low from yesterday and resistance is $565.80 (low from Friday).
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