The Dip Was Bought Again In SPX, But Will It Stick? May 20th Plan
Last week, ES put in a perfect 5 for 5: 5 green days in a row, and today, that extended to 6. The close on Friday however was slightly spoiled by a last minute credit downgrade by Moody’s, which triggered a dip that lasted from Friday’s close 5970s into around 2am last night to the low 5890s. What happened after that dip? No big surprise, it was bought.
As I’ve reminded readers every single day since the April 6th low - ES transitioned shortly thereafter to a buy dips regime. Even for day traders, most losses are preventable and come from fighting the dominant regime. Conversely, trading with it is trading with the wind at your back. By starting each newsletter by making it clear to readers what the regime is (buy dips or sell bounces) - and where it changes - readers have been able to avoid shorts and profit from what has been a 1100 point run.
Institutions in ES buy dips though in a very particular way. Specifically, they put in my core setup: The Failed Breakdown. They find a major cluster of lows, they flush those lows, trap shorts, recover, then a squeeze begins. Often, this setup occurs multiple times in the same zone as price simultaneously paints a bull flag on the chart. It was this exact setup that caused the monster squeeze we saw into Friday’s 5975 close. ES spent Tuesday-Thursday last week building out a clear bull flag mostly 5925 resistance to 5882-85 support. Last Thursday, ES put in a massive bear trap, lost the prior days low at 5890 down to 5868, recovered, longs triggered via Failed Breakdown, and we began a squeeze into Thursday’s close.
The task for bulls Friday was to defend that flag at 5925 and run it. They did. I wrote on Thursday at 4pm: “My general lean is to defer to the trend. 5925 to 5882-85 was a bull flag we’ve built out since Tuesday, and probed above today. As long as that flag is in tact, next leg up sees 5953, 5970-75, then 6000.” Friday morning, we tested 5925 exact, held, and ran to 5970-75 by Friday’s close, before the credit downgrade hit.
The question today would be - as always - can bulls buy it? They did. The core setup today would be the Failed Breakdown of 5925, which was the Friday low. I wrote on Friday at 4pm: “Below 5945 we work back down to that 5925 level again, and this is a big one. By now, this level has been tested to death (5 backtests). Could it hold for a 6? Absolutely, but I’d want to be patient with this. Ideally, I’d look for a Failed Breakdown of today’s low to long here.” After losing it overnight, we recovered it this morning, triggering that Failed Breakdown squeeze that took us to new highs.
Will today’s dip buy stick? In today’s newsletter I’ll talk this, I’ll the setup that caused the Thursday/Friday squeeze as while as today’s sqeeze as we saw perfect examples of Failed Breakdowns in action. Finally, I’ll discuss the actionable trade plan for tomorrow.