Break Likely to Come Soon.
Intra-day price tennis recently, but something's got to give.
SPX has more or less traded in a 50 point range over the last few sessions. This has been quite boring for swing/mid term trades and rather frustrating for day trading as we’ve whipsawed multiple times. But through all this, SPX has made lower highs and lower lows. The edge remains to the bear.
These types of conditions rarely last an extremely long amount of time. We can see chop like this at the low of a market (Multiple head-fakes before the true turn) and we can see stuff like this before a big bearish breakout, but rarely do we see this type of condition perpetuate itself - usually it’s setting something up.
We have to heavily skew the odds to the bears here because of the failure of the butterfly pattern to produce a clean low. This would be usually be a strong continuation pattern if it was working and weakness tends to imply it’s failing. A failed butterfly usually produces a near term crash (I’ve bet on 1,000s of butterflies).
The low here would usually come off the first rip. This was an area we had planned for risk of a bull trap or reversal when discussing the potential for the first drop.
See: Drop setup looks good. Let's plan support levels. (substack.com)
Followed up by the long exit at 4540: This would be high in a dead cat bounce. - by HoleyProfit (substack.com)
In the bull setup, I do not think a new low would be made after the entry near the first low. We’d usually have pushed a bit through 4540. Made a near term retracement and then went into the uptrend. A butterfly hold would usually have us somewhere over 4630 by now.
Even although it has not produced a big move lower, I believe the drop off 4540 and new low was an important failure of the up-move.
In this pattern at this stage the important levels are the 1.27 and 1.61. Upon breaking a 1.61 the 1.27 will often retest and it will often spike out a little. I’m used to seeing this once or maybe twice most of the time. Current action has followed this basic rule but done it three times (Which caught out a little in the recent ones).
Inside the context of all this, the fact we’re making lower lows and lower highs leans more to the case for a bear break than this being head-fakes into a low.
If and when this breaks the downside, it would be expected to be a strong clean move. That’s how things tend to work. Scare the bears, embolden the bears - repeat a few times to exhaust the bears and then few people are willing to bet aggressively on the real break because all previous ones whipsawed any attempt at following a break.
A 1.61 break here gives us a target at the 2.61 (Which agrees with our retracement entry level at 4400).
2.61’s have a fair chance of being a low and when broken are usually a critical break. If a 2.61 is broken we generally range there for a while and then we move to 3.20 - 4.23 fibs. The move from 2.61 - 3.20/4.23 is typically stronger than the preceding drop. Where downtrend turns to capitulation.
Note how the red path here is choppy and messy at the 2.61. This is quite likely. Usually a bull rip will be pretty clean off the low and a bear will trade flat with head-fakes for a while. This could be a bit of a theta zone (We’ll assess it for shorting options at the time, this is more of a warning to option buyers).
So at this point we’re waiting to see if price breaks down to this level. If it does, we’ll trail stops on anything that’s not time sensitive. Exit puts because there’s risk of flat markets and the puts will be well up at that price. Perhaps assess the market for shorting puts (But warily, since the next swing can be capitulation.
If we break over the 1.27 again and can make a new high, to be frank, that’s going to confuse things. In the event of that happening I may not make any decisions under 4600 and above 4450. My best guess at this point would be a failure of downtrend produces a strong move over 4600.
Currently my plans for an upside break are just to stop out and take a fresh look at the market. The downside break setting up looks obvious. We’re fully positioned for that currently and fully prepped on how we’ll act during that if it comes. If it fails we’ll get out the way quick before anything too bad happens.
I’d estimate we’ve likely to see a breakout before the end of the week. I feel like it’s today, but I am always reticent to give specific timeframes for big/fast moves. The market has a way of stalling just a little longer than I expected. I’ll say I very much doubt we’re still in this range this time next week.
Odds skew strongly to the bear side. With a caution that if it goes again us here we want to get out the shorts as soon as the trend structure breaks.
Trading Signal:
Short SPX 4490
Stop 4525
Target 4410