Well today we are seeing the strong bounce that we’d been anticipating in the stock market (if you missed yesterday’s piece, you can get caught up here).
Now that the S&P 500 has rallied to the doorstep of 1100, the question is – how much longer will this rally go? And when should we re initiate our short position on the S&P?
Jeff Clark – one of my favorite traders – wrote today that he believed this rally could go all the way to 1130:
Over the next several days, the S&P 500 could rally back up to 1,100 or even 1,130 if the bulls really take control.
Remember, though, dead cats always fall back to the bottom. Once we get a bounce in stock prices, we’re likely to come back down and retest the lows.
As a trader, I’m playing stocks from the long side right now. But I’ll be quick to take profits and I’ll be looking to short stocks aggressively if the S&P rallies back toward 1,130.
I did a quick back-of-the-envelope calculation – because markets are probabilistic, after all – to see where this retracement may end. For my calculations, I’m saying that this decline began at 1173 on the S&P, and ended at the intra-day low of 1040:
Source: StockCharts.com
The magical retracement range you always hear about is approximately 38-62% of the previous move. This would put us somewhere in between 1091 and 1123.
We hit an intra-day high today of 1098, and we sit just a point below this as I type. So the next turn down could complete this move.
Let’s sit back and see what tomorrow’s trading brings. If we do indeed get a rally towards the top end of my 1091-1123 range – or better yet, all the way up to Clark’s 1130 target, we’ll be looking to re-initiate our short position, for what we anticipate could be a doozy of a next leg down.
Remember, kids – the markets make the news, not the other way around. We needed a rally above 1100 to relieve the oversold condition and let everyone believe “things are going to be OK.” Which is perfect – it gives us the opportunity to take the other side of that wishful bet!
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{ 4 comments… read them below or add one }
We got a rally right up towards the 50 day SMA and it could go higher but we’re expecting this drop to be the beginning of a longer term transition lower. Don’t expect a pop to the 200 day SMA.
Nice analysis!
Thanks Rob! Appreciate you weighing in, I always love to hear what you guys are thinking over at Diamond Slice. That’s interesting that you’re not even expecting a pop to the 200 day SMA.
For readers not familiar with Diamond Slice – go there now! http://www.diamondslice.com/ Also over in the blog roll at right.
I enjoy reading your blog and thanks for aggregating news and views from different sources of financial info. After today’s action, do you still think the S&P could test 1130? Or was today the beginning of the next leg down to 950-975? Have a great long weekend!
Best
Shashi
Thanks for the comment and kind words!
I still think the S&P could test 1130 – I don’t think we learned anything today, being a pre-holiday trading session on lighter volume. It is possible the S&P topped out yesterday, but I don’t believe we have enough evidence yet to say that for sure.
Next week should be instructive – heavy selling should tell us that the ship is going down, likely to the range you mention. Personally I’m hoping for an initial pop that runs out of steam, so that we can position ourselves short.
Have a great long weekend too!
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