After 4 Deep Red Days, Is SPX Ready To Bounce? Feb 26 Plan
As written extensively, since the January 13th low (and more acutely since February 7th) ES had been in what I call buy dips mode. There have been plenty of dips: We sold 220 points from Jan 24th to 26th. We sold 220 points again on Jan 30th-Feb 2nd and put in multiple smaller 50-150 point dips since then. They all however, were bought promptly without ES putting in more than two red days and from February 9th until last Friday, ES grinded up with little drama and all dips immediately bought.
Recall that in ES we have an easy rule of thumb as to when ES will break steep rallies and put in substantial sells. It occurs when ES loses a significant, previously heavily defended support shelf. Last Friday, we saw this. We spent all of last week essentially building a base above 6116-23, with probes below quickly bought. I wrote last Thursday at 4pm: “If 6123-6116 fails, 6098 is the absolute lowest bulls want to see, below which, we can collapse.” Last Friday - for the first time since February 9th - ES put in an open-to-close red trend day, and for the first time since January 13th. This put in 3 red in a row and this took us down to 5996 which was a key support all day yesterday.
Bulls tried a relief bounce off 5996 yesterday, and it went 50 points before failing. Then today, bears took it down again. I wrote yesterday: “Bear case tomorrow: Begins below 5982…. For this entry ideally I’d want to see a bounce/failed breakdown attempt at 5982. After this, one can short below wherever the lows are. There is also a far more aggressive short available on the failure of 5996. For this one, I’d need to see another final tap of 5996 or around there. After that bounce, there is a possible short under the lows.” This morning, we lost 5982, and put in a deep 50 point, “elevator down” sell.
However, readers of this newsletter know though “elevator down” sells in ES, are always followed by equally violent short squeezed, and those are caused by my core setup: The Failed Breakdown. I wrote yesterday” “5934 is below 5982. I like this level better particularly if we can put in a Failed Breakdown of the February 2nd multi-week low which at 5935 now.” At 10:30AM, ES tagged 5933, put in a monster Failed Breakdown of the February 2nd low, and we were off to the races.
Today was one of the most volatile days of year. After 4 red days in a row though (for the second time this year), is ES ready to bounce? In todays newsletter I’ll talk this, I’ll do a deep dive into the setups that caused Friday’s/Mondays weakness (it was a combination of my two bearish setup types, the Back-Test Short, and the Breakdown Short). I’ll also discuss the cause of the recent short squeeze. Finally, i’ll talk the actionable trade plan for tomorrow.