Dead Cat Bounce, Or Bottom in SPX? Sept 10 Plan
While September a month is known for having a bearish seasonal average (typically in the back half), ES wasted no time this year and September saw an immediate character change from August, quite literally beginning on the first day of September trading last Tuesday. Last week was the largest red candle for ES since the first week of March in 2023 (in that case, it was a capitulatory candle that set the bottom for the year).
This selling was not random, and was caused by ES breaking down its two week late August base at 5585-90. I provided this short setup to readers back on August 30th (when we closed at 5666), writing: “Bear case Monday: There is no bear case until this flag breaks down at 5585-90. On a short-term basis, 5625-30 failure is likely a short though”. We sold from this to 5493 last Thursday, then last Friday, took another leg down, I wrote last Thursday at 4pm: “Bear case tomorrow: Begins on the fail of 5493”. From here, it was freefall to sub 5400 into Friday’s close.
Of course though, nothing goes down forever, and as I discuss daily in this newsletter, ES has a stronger tendency than any other market to short squeeze. What goes down in ES, comes back up at 2x the speed. It is as close to a law as one can get in markets. I warned about this on Friday at 4pm writing: “Obviously a short squeeze is around the corner… My general lean for Monday is we resume down to 5400, perhaps 5372-78. Those are both possible pivots to bounce us, with 5474-78 being an obvious backtest magnet”.
We saw exactly this today. Right after my newsletter was sent out Friday we flushed sub 5400, put in a capitulatory sell, then overnight into today, we got that short squeeze to 5474-78 by 10am from where we dipped, then resumed up to clear it before an afternoon sell. Was today’s bounce a dead cat bounce, or a sunstained low? In today’s newsletter I’ll go over in more detail 1) What caused Fridays meltdown (my third setupt type, the breakdown short) and 2) What caused today’s squeeze. I’ll then discuss the actionable trade plan for Tuesday.