Cliff Dive

Wow.  That was panic selling that we haven't seen since August 2015, and before that, October 2014.  But unlike those other markets, you didn't have a parabolic rise collapsing within days.  This market is unique in that it spent very little time above 2800, even though it went all the way up to 2870.  Even in 2000, you didn't have those kind of spike moves higher and then straight collapses lower.

If I have to find a precedent, it would be the flash crash of May 6, 2010.  You had a strong rally from February into April, taking the market up 180 points, or nearly 18% in just 2 months.  The market topped out in April and consolidated for several weeks before the plunge in May.  Similar to now, April 2010 built up a lot of complacency in the market, as the put/call ratios were extremely low day after day.  Also, the market was in a sharp uptrend, which is different than a flattening top that rolls over into a waterfall decline (August 2007, August 2011, October 2014, August 2015).

Similar to May 2010, you had built up a lot of complacency in the prior months, which led to a huge selloff intraday for no reason, as algos went bananas and selling beget more selling.  That is similar to what you saw from yesterday afternoon and spilling over into the after hours session.  The ES dropped 80 points from the futures close, a huge move and the panic was thick overnight, much scarier than the post election overnight panic, because this was on no news.

So what is the game plan?  I wrote a couple of blog posts about a similar market in August 2015, that could provide a basic guideline to trading these type of markets:  Mix of August 2007, August 2011, and August 2014 and Hopeful Opens and Scary Closes.  This is a bit different market in that we are still above the 100 day and 200 day moving average, despite the carnage.  Those other markets easily pierced through the 100 day and 200 day moving averages before hitting bottom.  It doesn't mean we have to do that here, but the 200 day moving average is at 2535, so I guess if you count overnight prices, we did pierce the 200 day.

Based on the overnight range, of over 100 points, SPX should be contained today between 2540 and 2640.  That isn't a huge help when the ES is trading at 2590, but it gives you an idea of the boundaries that have been set in this panicky market.  You will not have traders willing to push the ES above 2650 given the recent price action, and you will have bargain hunters and corporate buyback flows providing support at SPX 2540-2560.  Once the dust settles today, we should have formed a tradeable bottom which could take the market back up to 2700-2720 area.  I don't think you can get back much above that zone, maybe 2740 if the market gets overextended, but that will provide a strong lid to this market, and we'll have a tradeable range where you sell anything around 2700, and buy 2550-2600.  The ranges are still fluid right now, but after today's cash session, it will go a long way towards forming the bottom of the new post crash range.

I expect that range to hold for at least the next 3 weeks, so it gives enough time to trade it and profit and move on before a range breakout becomes more likely.  Today is the key.  If we have another panic session like yesterday and break through the overnight lows, you are looking at 2011 type of selling and who knows where the bottom is, maybe 2400.  But it looks like the market has capitulated already, and seems like the market will find value today between 2540 and 2640.

Longer term, this market looks to be forming a massive top and this panicky selling is part 1 of that top formation.  It is trading more like 2000 than 2007 or 2015.  We may have one last gasp rally in the spring towards the January highs after you form an intermediate term bottom this month, but I expect that to be sold and for the next bear market to start in earnest.

Looking to buy any dips down intraday towards 2540-2560, with a 2-3 day holding period looking to sell at 2700.