Strong selling likely to come soon.

It feels like the chop before the drop.

SPX has traded largely sideways on the inflection point. I think this is setting up a break and we’re going to head down to the following supports close to 3500 and then potentially into a much stronger break if this swing comes. See the macro S/R levels here.

Let’s have a look at a few ways we can make possible trade plans for this. Establishing entry levels, breakout levels and levels at which the analysis methods fail and trigger a stop loss on shorts.

The case for bull failure at this point is easy to make. While it looks like not much has happened in the range, using the fib based norms we have triggered good short signals. Our first one is the failure of the 76 fib and the hitting of the 86 fib. Commonly, the uptrend has failed on the 86 hitting.

We can comfortably range 86 - 61 fib here without this invalidating the bearish breakout. Highlighted is the first touch of the 76 and this is where we’d have expected to see the market rip in a basic 76 trend constitution pattern. The market trading flat between these fibs is conspicuous. Not what we’d usually see in a bull.

We can derive the same breakout level using a 161 of the topping swing. With this, we should typically see the low being made once the 161 is hit.

In a break, we commonly see price range between the 161 and 127 fib. And then in the break of this type of pattern we head quickly to the 220 fib (3700). I think we’re probably getting close to this break and drop to 3700 now.

Limit orders for short

One of the easiest things you can do when it comes to situations like this is look to see where most people would be caught out and then place your limit orders here. While this will not always work, it will tend to help you have orders in the spots where there are good statistical edges.

Where this would be in this situation is obvious. If we spike out the recent range this would stop out bears and bring in bulls. Placing our limit orders in this zone would have us fading the easy levels a lot of people are liable to be trading.

The spike out failing to form could produce a waterfall style break from this level.

I am always cautious when it comes to fading stop hunt/spike out style moves. They happen more often than they do not. However, if we do make the break we’d be liable to head into strong lower low/lower high trend and tight stops would be effective in staying in the short trade if it was working and getting out early if it’s not.

We have somewhat confusing action as per classic TA because we concurrently have lower highs forming and lower lows. Seeing both of these together is quite rare and it leads to a contraction in the price. Which can be brutal to trade. Personally I’ve sat out during this.

We’ve exhausted the amount of time a range usually takes. Usually in a range we see about 5 - 7 major turning points and then something new happens. Ranges can not last forever and I think we’ve used up most of the time a range should be expected to last here. It’s time to get ready for a break of the range.

After us having held the range for so long, it should be expected the break of the range will be strong a brutal. Not going to be a fun one to be on the wrong side of.

Trade entries

I am placing limit orders in the little zone about the range for a spike out but I think this is a reasonable spot to take a shot at the range break. The pattern I am using for entry here is the failed butterfly. While we’re in a range, harmonics should perform well and this wold typically have made a low on the 161.

In the most recent hourly candle we might have seen the first major failure.

Short SPX 3813

Stop 3869