Futures are screaming higher on Sunday evening, up over 2%. As I discussed on my video recap last Friday, the issue was whether a bounce from oversold conditions would even be worth playing. One of my main disciplines as a trader is largely sitting out and observing the first 30-45 minutes of trading every session, when volume tends to be anemic and price swings wild. As a swing trader, this enables me to get a feel for the action, without losing capital trying to figure it out. Moreover, there are few occurrences in the market that do more damage to a trader’s psyche than consistently chasing an opening gap in either direction, only to see it faded aggressively after the initial move.
First and foremost, there is an awful lot of time between now and Monday’s opening bell. So, the rally may become a moot point if we wake up to a flattish open. That said, should the bounce stick I am watching to see if it survives past the first hour of trading. I will be watching all of the usual suspects that are proxies for risk appetite, including the Euro, Freeport McMoRan, consumer discretionary plays, and energy. A gap up from oversold conditions is generally not favorable to swing traders looking to initiate fresh longs. I would prefer to see the bounce faded initially, and then make an afternoon push.
From a broader perspective, regardless of whether tomorrow’s bounce sticks or not for a quick trade, I remain very concerned with the weekly chart of the Nasdaq Composite Index. As you can see below, the threat of a weekly breakaway gap demands my respect, at the very least. Note that we have not seen such a visible gap down with a bearish marubozu candle since the October 2008 crash. Hence, I will most likely remain highly cautious on the long side until that gap at least becomes somewhat filled above 2.540.