Monday, August 4, 2014

1910 to 1940

The initial impulse down move off of the top we made on July 24 has defined its range.  ES 1910 is the bottom of that range and 1940 is the top of the range.  Usually after a down Thursday and choppy Friday, you do see a gap up on Monday, and that's exactly what we're getting.  I would have made a play for the gap up on Monday if we had gotten a little closer to 1910 on Friday's close, but the risk/reward wasn't that compelling at 1918.  Usually after the carnage over the past few days, in this market, you will have those that have been waiting in the weeds for a 3-5% correction suddenly willing to put on equity exposure.  That is the bid you will get today and tomorrow.  Beyond that, I don't trust the long side.

Just like late January, we consolidated for several weeks, chopping boringly at the top and then suddenly dropped 40 points in a single day.  If we are to follow that script, and I am not saying we will, since this situation is definitely more bearish (we are 150 points higher, catalyst of lower bond yields has mostly been used up, QE nearing an end).  So at the minimum, we should selloff for as many days as late January early February.  That selloff lasted 10 trading days.  I am expecting a 12 day selloff this time around, +/- 1 day.  Strong support is not at 1900, but at 1880.  If we break 1910, which I expect within a week, we should slice through 1900 with ease.

At 1880, I am willing to take a swing long ES position and hold for a move back up to 1940.  I think that is where the best risk/reward is.  Short side still feels vulnerable to monster short squeeze gap ups out of the blue, because bloggers are bearish, so I am only going to short rallies, not down moves hoping for panic.  

It is now better to short ES than go long Treasuries if one wants to play for a down move.  The Treasury market looks exhausted on the upside.

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