Friday, June 30, 2017

SPX and NDX: First Downside Targets Captured -- What Next?

(First off, still having issue with StockCharts, so I updated the most recent charts.)

This market has remained difficult to trade (and predict), so in the last update, I suggested a trading strategy as follows:

At this point, the worst case scenario for anyone who's been trading these charts is that they now have profits to protect.  And there's something to be said for protecting some of those profits in a market environment that has been incredibly hostile to bears for the past 8 years.  For me, I plan on protecting about 50% with trailing stops, while letting the other 50% ride with stops near my entries (for now, anyway).

Using that strategy, one got stopped for a small (but still decent) profit on 50% of NDX shorts (during Wednesday's rally), then captured about 230 points of profit on (most of) the remaining 50% of NDX shorts yesterday when the first downside target zone was captured.  Considering how difficult this market has been, I'm not complaining about how that trade worked out.

The thing is, it may continue to be difficult for a time.  First off, the "good" news:  In all likelihood, there is no intermediate bottom in place yet.  I say this because, in NDX particularly, the recent decline from 5845 is almost-certainly three waves.  Five waves are "required" for a decline in this position to complete the move, not the three we have (this is why we can surmise that the bottom isn't in yet).  Linear thinking leads one to conclude the decline will continue directly, but that's not necessarily the case, as we'll see on the chart below. 

Given how complex this move has been so far, it's entirely possible it intends to get even more complex -- so I've shown that option below, in red:

If NDX instead bounces a bit today and/or Monday, but remains below 5757, then turns and drops through yesterday's low -- well, in that event, then we might see things get nasty immediately.  We'll see how it goes -- the green trend line is first meaningful resistance.

SPX has similar options, and also captured (by a hair) its first downside target zone:

In conclusion, we can say with some degree of confidence that it is unlikely a meaningful bottom is in place yet... however, the market might still have more tricks up its sleeve.  The thing is, it's simply impossible to predict at this point whether the move will become more complex (as shown in red on NDX) or be straightforward -- the best we can do is remain aware of the possibility, and view it as a short op (against the all-time high) if it materializes.  If we keep heading lower directly, then we'd have to at least consider the possibility that the market is building a massive bear nest, which could lead to a breakaway decline on a breakdown at yesterday's low.  Trade safe.

No comments:

Post a Comment