Dead Cat Bounce, Or Interim Low For SPX? April 8 Plan

Last week concluded with the much advertised largest red week since March 2020, but this statistic is slightly misleading because in actuality last week was far worse: The weekly range was 700 points from start of sell to end for ES whereas the largest range red week during the March 2020 COVID crash was 522 and in last weeks case, we traversed from the top of the range to the bottom of the range in a two day stretch. This continued into this week, formally putting ES in a bear market. Extreme volatility periods like this are when the fundamentals of trading (risk management, level to level trade management, entry discipline, non-predictive disposition) are of the utmost importance. In normal volatility the market can be very forgiving to those with poor fundamentals. In periods like these, the market is merciless and even a minute slip up can be ruinous.

One of those fundamentals is 1) Not predicting the price action. Having a plan for where to react in various scenarios, then doing so and 2) Deeply understanding how downtrends function: They alternate between “elevator down” sells (caused my third setup type: The Breakdown Short), then short squeezes which are caused by my core setup type (the Failed Breakdown). This sometimes happens many times in a day.

Back on Thursday at 4pm I wrote: “Bear case tomorrow: Bears control by default and next leg down begins under 5428.” and shortly after 4pm, we lost 5428, selling to 5377 early Friday morning before a round of China retaliatory Tariffs took ES deeply lower down to 5075 by the close Friday. Again our job as traders is not predict what the next Tariff headline is, or how far the next sell is going to go, or when its going to start. We just trade it - we identify candidate zones for Failed Breakdowns, wait for it to trigger, manage it level to level, get out.

Last night the carnage resumed again and we got gap down open into “elevator down” sell to 4832 off the open. As usual, this means a short squeeze/Failed Breakdown would be incoming and I tweeted shortly after the open last night that recovery of 4910 would start the move to fill the opening gap. This triggered last evening, and ran us to 5037 this morning. A hugely lucrative trade, but shy of filling the gap. At 9:46AM this morning, I tweeted again that 4910 reclaim would setup the gap fill at 5075, and not only did we get this, we rallied a shocking 377 points in one of the sharpest short squeezes in the history of the S&P 500.

It was a good bounce today, but is just another dead cat? In today’s newsletter I’ll talk this, and I’ll do a deep dive into what I call the downtrend sequence as referenced above as we’ve seen it over and over all week: Failed Breakdown (short squeeze), Breakdown Short (which is the subsequent failure of a Failed Breakdown), which causes an “elevator down” sell, repeat. Finally, I’ll talk the actionable plan for tomorrow.