Huge Two Week Pattern Breakout For SPX, But Can It (and Bulls) Survive The Slew of Catalysts Next Week? October 27 Plan
NOTE: This is a resend of the newsletter for Monday October 27th, originally sent Friday 4pm for those who did not receive.
I’ve frequently talked about trading ES is simple but not easy. Its not calculus - there are not hundreds of concepts to know. There are a few that cycle and string together in predictable ways that we can exploit. The first of these is something I’ve talked about since April: ES is an asset spends the majority of its time trending upwards (~75% of the time over the last 100 years). Therefore you have to respect the trend, not fight it. I’ve called this since April the buy dips regime - we get lots of dips, some are massive (October 10th -4% red day) - but they get bought.
Secondly, you need to know how institutions buy those dips, where, and where they likely target. I’ve frequently talked in this regard about ES cycles between two things: Elevator down sells (these are violent, vertical flushes that cut every support), and short squeezes. Short squeezes are caused by Failed Breakdowns which is where price sweeps a low, traps shorts, and squeezes. Those Failed Breakdowns typically target a Back-Test of where ES broke down from to start the elevator down sell.
The last two days were case in point here: On Wednesday, ES got hit with a China headline and went elevator down, selling rapidly 100 points from 6790 down to 6690. What comes next? The Failed Breakdown/short squeeze. Readers were prepared. I wrote on Tuesday at 4pm: “There is not much below there until 6698 and same thing applies there. If we are really melting down, the best setup here is to wait for the Failed Breakdown of Sunday’s 6694 daily low. Ideally wait for 6702 to recover before hopping in here.” We saw exactly this at 2pm Wednesday We flushed 6698 down to 6690, recovered/Failed Breakdown, ripped into the close Wednesday to 6740.
Where do these squeezes target? They Back-Test the zone that was originally lost to cause the sell. In this case, on Wednesday ES lost a two day shelf at 6766. Therefore, that was the target. I wrote on Wednesday at 4pm: “At 2pm today, ES put in a Failed Breakdown under 6698 and ripped us higher. The bull case tomorrow is simply that ES can resume up to backtest 6766 again. Likely dip/reaction there. After that if bulls have the momentum, we can head higher to 6782.” This played out perfectly and by 9:45AM yesterday we hit 6766 exact to the tick, dipped, then cleared it and closed the day at at 6782.
Today was CPI day, and the task for bulls was to keep it going. ES closed yesterday at resistance of a massive two week triangle pattern. My lean was they could push through. I wrote at 4pm yesterday: “In the most severe bull case ES will hold above 6766 and flag out above 6772 and below today’s highs. From there, we will head up direct….This opens up the next leg higher which targets 6787, 6803, 6820, then 6854. 6854 is resistance of the huge two month megaphone pattern shown in purple below” We got to 6820+ minutes after CPI, and ripped to 6840+.
We broke out a big two week triangle pattern today in ES, however next week has a massive slew of catalysts (FOMC, tech earnings, US/China Meeting). Can the breakout survive it all? In today’s newsletter I’ll talk this, I’ll do a deep dive into the Failed breakdown that caused Wednesday/Thursday’s 90 point squeeze (this is important to know so you can spot it next time). Finally, I’ll talk the actionable trade plan for tomorrow.