Tuesday's bounce in equity markets met the expectations of many traders. In that morning's Trader's Daily Notebook, we discussed the idea that shorter timeframe traders would likely be stalking one- to two-day bounces in names that were still holding above recent support levels or higher timeframe moving averages (MA). And most stocks did manage to bounce. Unfortunately, and I know I'll be labeled a killjoy for saying this, I believe it's premature to assume Tuesday's rally is anything more than an oversold bounce.
I like a tradable bounce as much as the next short-term trader. And closing back above the 50-day MA is unquestionably a bullish development. But until the E-Mini S&P 500 futures (Es) recapture the 20-day MA over a multisession period, my inclination is to remain defensive and closely monitor opportunities to sell the market short in and around the low 2460s.
Longtime readers know I'm not a fan of crediting rallies (or declines) to anything specific. The financial media, however, always find a way to isolate a bullish story to support a rally, and a bearish one to blame should stocks decline.
So with that in mind, if you bought stocks because of reports that White House aides and congressional leaders are making progress on ironing out tax reform, I'd encourage you to proceed with caution. A random midnight tweet from President Trump, an unexpected twist out of Jackson Hole on Friday or another scary story out of North Korea could quickly reverse Tuesday's gains. Remember how smoothly health care reform was supposed to unfold given the GOP majority?
The bottom line is if you're chasing the current advance on the long side, make sure you have an unemotional and logical risk-management plan in place in case the oversold rally falters, and price fails to gain acceptance above our short and intermediate timeframe moving averages.
Moving on to Wednesday's Es auction, we'll treat 2445.50 to 2446.75 as our day timeframe pivot and look for all trading above that area to encourage continued buying toward 2461.50 to 2463.
While sellers will be expected to re-enter the auction around Tuesday's 2454 intraday high, the path of least resistance over the very short term looks to be higher. That said, I don't believe Tuesday's rally reverses the downtrend that began with the Aug. 8 rejection above 2480. While value did migrate above the mid-2440s during Tuesday's auction, thereby easing pressure on bulls, I'll want to once again look for reasons to fade strength into 2461.50 to 2463.
A close above the low 2460s would result in the Es recapturing the 20-day moving average and likely shift our focus back toward new contract highs.
A bearish gap or brief probe beneath 2445.50 won't reverse Tuesday's rally, but if value is established beneath that level over a one- to two-hour period, day timeframe participants will want to be on the lookout for a quick test of 2439.75, and potential collapse toward 2430.75.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my Twitter feed @ByrneRWS