Is Today's Bounce A Dead Cat, Or A Bottom For SPX? Dec 20 Plan
Yesterday was a little piece of S&P 500 market history because not only did we put in the largest selloff after an FOMC day ever, but we also put in the largest red day of the 2024 year. The cause of this selloff was a highly combustible combination: ES had - as readers were well prepared for - built a massive, mature, 1.5 week base between 6105-15 and 6170. Combine the failure of that with an FOMC, and we get fireworks.
I wrote in my Tuesday newsletter before FOMC that: “Bear case tomorrow: Begins on the fail of 6105”. We lost 6105 shortly after FOMC which formally handed the ball from bulls to bears, and they ran with it like they never have in 2024. Of course though after a day like yesterday - what I call an elevator down day - we need to position for what comes after an elevator down day: The Short Squeeze. I wrote at 4pm yesterday (when we were sub 5928): “After a sell like today, the primary thing to be on guard for will be short squeezes. As readers who followed closely during previous sells this year or during the 2022 bear market know, “elevator down” days like today have a close sibling: The short squeeze, and they are often just as ferocious as the leg down, but it only occurs when a significant resistance reclaims”
What would that short squeeze trigger be? The 5928 level which was also the November 19th low, to put in a macro Failed Breakdown. I wrote also wrote at 4pm yesterday: “My general lean is we can see a relief pop, but 5928 would need to recover to trigger it. Targets would be 6001-03, 6025, and if bulls are very motivated, we can backtest the full breakdown”. This followed trough incredibly well. At 430 PM yesterday we reclaimed 5928, and rallied 70 points to 6001-03 target by this morning which set the high of day, from which we sold.
This then begs the question, is the bottom in, or was this merely a dead cat bounce for new lows? In today’s newsletter I’ll talk this, I’ll talk what caused yesterdays sell and what then caused this mornings short squeeze in more detail - these are important to know especially in a downtrend. Finally, I’ll talk the actionable trade plan for tomorrow.