Monday January 25, 2016
Key Developments :
- Market gives back much of Friday’s gains with H&S pattern formation and trigger.
- Inverse H&S under attack, but might still be saved.
Today was a day of flexibility. We came in with a bullish bias due to the oversold conditions and the multi-day inverse H&S we discussed in the weekend video journal.
However markets were in a bad mood due to a big reversal in oil, that had the index under selling pressure most of the day with a mid-day rally off an intraday inverse H&S shown below.
However after that target was acquired, strength was sold and on the bigger picture, we triggered a bearish H&S pattern that nearly acquired it’s downside target into the close. With this being a multi-day pattern, not completing it into the close is fine, and there is a pretty high probability this will complete sometime tomorrow, so let’s watch for that.
This leaves us in a very interesting spot as we have not destroyed the larger Bullish Inverse H&S and today might just be a shakeout. I will be watching to see if buyers step in at around these levels tomorrow, potentially right off the target acquisition. It is very possible we bounce from this area of support. so watch for a higher low to be set in this area of support.
If we use the vwap from last weeks lows, we notice the SPY closed just below it today. This area is still very likely to be support, so don’t get your bear hats back on just yet.
Now if we want to be more bearish, a scenario that could very well develop is something like the following. We don’t know what is going to happen, but what we try to do is look at the big picture, understanding how markets typically move and put on our radar things to watch for. Below is something that could happen and would target a retest of last weeks lows. So do keep this in mind.
The Bottom Line:
Markets were in a bad mood today after the 2.5 day rally. However, the bullish inverse H&S still has a shot even if the bearish pattern completes to morrow morning. Watch to see if any support comes in via a higher low at these levels and if we can rally through Friday’s highs. Keep a flexible posture as we could just continue to see bearish patterns form and fire as we did today. Yes the market is oversold, but big picture (as discussed over the weekend) is still very ugly. So we need to expect and be prepared for bullish patterns to struggle as they did today. It doesn’t mean they won’t work, but we need to manage the risk and recognize it as it presets itself, as it did today with the reversal pattern. Flexibility is a must in this volatile market. If you can’t be watching things closely, it is best to sit in cash in my honest opinion. This is not a throw it and hope it sticks environment like we have been in over the last 6 years. This is a traders market not an investors market. Investors should be on the sidelines waiting for the coast to clear.
Chart of the Day:
Here is a chart I mentioned in the weekend journal as a potential trade if it could take out the prior swing high of 8.83. It did that with a nice gap and go today. I like this chart because it offers 2 trading patterns, both are inverse H&S. We see the larger pattern which developed over 6 months from July until now. The 2nd is in the right shoulder of the larger pattern. When we see this, it offers a very powerful trade. Today as you can see in the chart, the first pattern acquired it’s target. Let’s see if we can see some minor consolidation and then a move to the next target at 10.75.