Thursday, December 11, 2014

5 day Pullback

I underestimated the pullback and thought we would get a quick dip and rip higher, which did not happen.  Probably the biggest clue yesterday that we would close weak was the lack of volume on a down day by lunch time.  Usually on a down day, you want to see a lot of volume to clear out the weak hands and get the job done.  Low volume means you have to stretch out the pullback over more days.

After the quick one to two day dip, the next stage of pullback severity is the 5 day pullback, which is fairly standard after a big up move.  As I have mentioned in a previous blog post about pullback cycles, the 3 most common lengths of pullbacks are the 5 day, 13 day, and 22 day.  Since we are nearing Christmas and the slow trading season, a five day pullback seems most likely here, especially considering the lack of volatility previous to this down move.  The first dip is usually to be bought, and this is the first significant dip we've had since October.  The next dip will be trickier.

So that gives us today and Friday as the most likely window for any more equity market weakness.  After that, you start getting more positive seasonality as we approach December options expiration and then Christmas.  Most of those looking to lighten up before the Fed next week, Christmas and New Years are doing it this week.  I view this week and these price levels as a buying opportunity of course.  It doesn't mean that we can't go a little bit lower.  We could probably get down to around 2015 on this leg lower, or we could have made the lows yesterday.  Not totally sure, it is nitpicking price points, in either case, the upside from here is greater than the downside for the rest of the month.  Keeping the swing long.  Perhaps till we reach Christmas.


MM111 said...

Nice bounce but FTSE lagging like crazy.

Market Owl said...

I am out of the ES long. Don't like the price action with the VIX outperforming the inverse of SPX. Will look to get back in lower.