Thursday, January 21, 2016

SPX and RUT Capture Downside Targets

Yesterday saw the capture of the preferred count target zones in both RUT and in SPX.  Folks always wants to know "what's next?" -- but this is a good moment to relax and enjoy the completion of some very successful trades.  As I wrote last night in our forum:

Random Trading Psychology Thought: Sometimes it's a good idea to take a moment to allow a big victory to settle in before rushing off to fight the next battle. Daily study is a discipline, but never-ending daily account expansion is impossible, and trying to achieve it only leads to ruin.  In other words, after a big win, taking a victory lap with the attitude that "I won that round, so I don't NEED to know what happens next" is often beneficial to one's account. In my humble opinion, of course.

Accordingly, we're currently in "victory lap" territory:  The decline might be complete, or it might not.  As I've said for years:  We don't need to know what the market will do every minute of every day, we only need to have a good enough idea often enough to make money.  And, of course, the discipline to both manage our risk, and to know when to take action and when not to.

That said, if I were forced to pick an outcome, I'd say that the odds probably still favor further downside before it's all said and done -- I'm just not sure how actionable that is at this exact juncture.

One potential warning for bears is that not only were downside targets captured, but RUT actually retraced all of yesterday's drop and then ended the session in the green.  That type of price action can be a signal of a near-term bottom, so bulls might take control of things for a spell.  If bears can sustain a breakdown, then that bullish signal would be rendered null and void.

Note that RUT bounced almost perfectly off the dashed blue megaphone line, which was highlighted as potential support back on January 8 (that line was, in fact, what led me to the 975 +/- target zone in the first place).  In any case, that support line was, and remains, the dividing support zone between targets 1 and 2.  In other words, if bears can sustain a breakdown there, then we should probably look towards target 2.

SPX captured and exceeded its 1825-35 target zone -- that target was arrived at using the "eyeball method" (the "eyeball method" involves looking at the wave forms, studying how they relate to the overall chart, and then deciding where the market's going from there.)

In conclusion, SPX and RUT have both captured their preferred targets for significant profits, so now we're going to watch what happens next and let the market declare its next intention.  As I mentioned, if I was forced to pick a side, I'd be inclined to think that the decline isn't done in the bigger picture -- but just about anything is possible over the near term here, and a decent bounce would be quite reasonable.  Trade safe.

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