Tuesday, February 4, 2014

Crack City

The market broke last week's lows with vicious force.  We have now gone down 100 S&P points in 8 trading days, the quickest 100 point drop since the Eurozone crisis in fall of 2011.  Yes, we are at higher levels now so 100 points at current levels is a smaller move than 100 points in 2011 or 2012.

I am leaning towards the 22 day pullback. I've noticed that 22 day pullbacks are usually preceded by a blowoff top like we saw in April 2010, late April 2011, September 2012, and May 2013.  It could be argued that we had that blowoff top at the end of 2013 after the FOMC meeting.

The importance of timing the length of these pullbacks is to avoid getting short squeezed on the strong bounce higher after the pullback is done, and to avoid getting long too early and having the market go down further day after day.  It is not an exact science, just an observation of the price action over the last 5 years.  Looking back at 2006 and 2007, patterns were similar, although the 2007 top was quite sloppy and volatile, so the timing was a bit different.

By the way, these are bull market patterns that I have observed, in a bear market, the timing mechanisms are totally different, as the primary trend is down, not up.

After a big down day like yesterday, I will be looking for a place to get long, slightly below yesterday's lows, around ES 1730, playing for an intraday bounce.  Although I expect there to be a lower low intraday, I don't want to short today, because I anticipate a fast and furious bounce.

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