Analyzing last week’s price action leads me to conclude that a sharp rally is probable on $ES.
As previously noted here, the indexes were building bullish structures. However, those structures broke down later in the session but that does not necessarily negate the bullishness just yet. Here are some pieces of evidence that I am incorporating:
- In this post, I provided an argument for why I expected greater complication in the correction than we had seen up until then. We have since satisfied that by having a rally followed by a further 3-swing move lower. Now the correction that began on 9/3 has two distinct halves. It could become even more complicated, but one step at a time.
- In the short-term, the “second leg,” which I use to refer to the price action from the 9/9 morning high onwards has a good fib relationship with the first leg that began on 9/3 (see image below).
- The emotional panic-selling into the close is almost never rewarded with further declines. This price action is what Jeffrey Tennant refers to as a “wall into the close.” Statistically they are often (but not always) reversed.
- There was a volume spike which is a symptom of capitulation.
- As I pointed out here, the $VIX has approached its big wedge, and I would normally expect a reaction there.
- And finally, we had 5 consecutive days of declines, which is statistically very rare. The odds do not favor a sixth day.
It is too early to definitively call for a resumption of the interminable uptrend we’ve been in, but at a minimum, to remain on the conservative side of things, we may expect a rally to the 4490-4500 area, which would be the 50-61.8% retracement of the second leg down.
[UPDATE]: Since we did immediately get a short-term rally as expected (green arrow below), I will file this as a successful call.
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