Pre-Open Market Analysis
For the past month, I have been writing that the stock market has never been this overbought on the daily, weekly, and monthly charts in the 100 year history of the Dow and S&P indices. Furthermore, I said that a 5% correction was likely to begin within weeks. The market is now down almost 10%, and many traders will wait at least a month before buying again.
Yesterday’s crash on the 5-minute chart achieved all of the immediate goals of the bears on the higher time frames. The stock market tested the 20-week EMA, fell below last month’s low, and corrected 5%. Since the selloff was strong, it will probably continue lower, and possibly for several months. The next target is the November 15 low of 2558.25, which was the start of the tight bull channel on the daily chart. The target after that is a measured move down based on the height of the January buy climax. That target is around 2450.
Importance Of The August 8 High Of 2489.50 High
That measured move is below the August 8 high of 2489.50. I have mentioned this price many times. The September 25 low was a test of that breakout point. Since it was a small doji day, it was not a good foundation for a huge rally. Therefore traders should look at it as being unable to support the January rally. Consequently, the bulls want more support. This means that this selloff might have to retest that August 8 high before the bulls will buy again.
The bulls will want at least a micro double bottom over the next few days, or a double bottom over the next 2 months, before they will buy aggressively again. They prefer the double bottom to begin to form now, but the bears might be able to drive the market down to around 2450 first.
Big Bars So Trade Small Or Not At All
The bars will probably be big again today. If they are, the risk would be very big. Day traders, if they are trading, should trade very small. Most should simply wait for smaller bars. Because yesterday was so extremely climactic, there is an increased chance of a reversal today. It could come on the open, or at any point during the day. Furthermore, it could be violent.
Stock-Market Crash On 5-Minute Chart, But Not Daily Chart
I said this is a crash on the 5-minute chart. Can it become one on the daily chart? I was trading on the day of the 1987 Crash. Yesterday was no crash on the daily chart and it is unlikely to become one. Yesterday fell 5%. The 1987 Crash fell 25% in one day. As scary as today was for beginners, the 87 Crash was 5 times bigger! That is probably unimaginable for new traders, but that is the fact. The bears need to do much more to turn this into a crash.
There is one important similarity with the 87 Crash. There was no clear fundamental reason for it to happen. And that is true now as well. I have talked about the reason for this selloff many times. It is purely technical. The stock market has never been this overbought (read any of my weekend blogs), and it is simply undoing the excess.
Overnight Emini Globex Trading
The Emini is down 27 points in the Globex session. However, it was down about 100 points earlier overnight. The bars on all time-frames are huge. This means that stops are far away, which creates extreme risk. Most day traders should wait for the bars to become smaller before trading.
This sell climax is extreme. Therefore the Emini will probably rally strongly today or tomorrow. While it is possible that the Emini might go straight up to the all-time high, when a bear breakout is this strong, most bulls will not want to buy until there is at least a micro double bottom. As a result, the strong January rally and big February selloff will probably lead to a trading range over the next month. Since the range so far is about 300 points tall, there will be huge rallies and selloffs over the next few weeks. It will probably take a couple of months before the size of the bars on the 5 minute chart are back to normal.
Yesterday’s Setups
Here are several reasonable stop entry setups from yesterday. I sometimes also show limit order entries and entries on the close of bars.