Wednesday February 24, 2016
Key Developments :
- Market bounces off key support
- Left with very little conviction on next direction.
Today was a pretty good and wild day of trading. Looking above we saw that markets gaped lower and filled last Tuesday’s gap, while also finding some support at the 38.2 Fib retrace. As we can see there were 2 bullish patterns to play today. The first was the inverse H&S which triggered around 11:30 AM an acquired it’s target up at 1910.52. From there the market made a minor pullback and formed a cup/handle which also completed into the close with a target at 1930.72. So intraday a nice wild swing and basically what we expected. I was tweeting out this morning that I was covering shorts pre-mkt and was looking to get long which is exactly what I did.
If you remember from the last two reports (last night), we were looking for the formation of a H&S pattern on the 30 minute chart, however, with this mornings lower low, we have less confidence in that play. When we make that lower low and bounce, it squeezes shorts and you get the type of action we had today, it really screws up charts because you have people too bearish and get squeezed. This is Ok, we try to anticipate what is going to happen and have a plan for it like we did by covering at 190.50 pre- mkt. When things don’t do what we expect, we adjust. So let’s do just that.
I went home flat today, because in the big picture, I believe things can go either way and do not have much conviction either way yet, but am leaning with a bullish bias.
Let’s review a couple of scenarios.
With today’s pullback to the 38.2 fib and hold, we appear to be forming a double bottom cup/handle like we did in October. The 2nd chart below will show you how it played out, but we triggered it and ultimately failed at the 161.8 fib retrace. That level is the 2033.60.
For a full review, that October rally didn’t fully acquire the measured upside target, but ultimately failed at the 61.8 Fib retrace, so something to watch for if we do indeed break above the recent highs. That target would almost get us flat on the year. Something to keep in mind.
The reason I am less convenient in the 30 min H&S as the lower low makes it look more like a Diamond. I hate this pattern, but it is what it is. They can go either way but breaking above or below the peaks is the most critical.
The Bottom Line:
It is not our job to gamble on direction. After 2 days of having a pretty good idea of where things might go, I am less confident here. If we use October as a blueprint, a rally above 1950 could take us to 2033. I’m really in wait and see mode at the moment. To summarize here, trade very open minded as always. This rally may still have legs.