Bears Trying to Come Back Over the Top

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This morning is quite sloppy and nasty, as the elevated VIX implied violent price swings. The S&P 500 is still well above yesterday’s lows of around 1100, but the closer we flirt with that level, the dicier things can become for the bulls. I am still sitting in all cash, for nearly a full week now, waiting for the dust to settle. If today proves to be the final aftershock, then I would imagine I could become very aggressive in a short amount of time. I am also still watching that $62/$63 crucial area on the XLE for market strength, or lack thereof.

 

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Looking over dozens of charts this evening, I am noticing some powerful combinations of bottoming candles, after the requisite prior steep downtrend of course. To be sure, the global liquidations that we have seen over the past two weeks are likely to offer up some rare opportunities, provided that this time is not different. As I discussed in a video that I posted this morning, history tells us that when the market is near 52-week highs, and then suddenly sees a swoon of this magnitude (See: 1998 LTCM), it is a far cry from the devastating climax of a late-stage bonafide bear market crash (See: October 2008-March 2009), in which subsequent bottoms can take six-to-eight months to form. In other words, barring a clean break from history, the worst of the correction is likely over, if not altogether.

The inverted hammer candlestick is considered a potentially bullish reversal signal when seen after a prior steep downtrend (when seen after a prior uptrend, it can be bearish and is referred to as a shooting star candle). Fancy names aside, these candles mean nothing without follow-through in the direction in which they seek to reverse. A great example of hammer candles that meant nothing was last Wednesday, when the S&P 500 printed a textbook hammer reversal, only to see us crater 500 Dow points the next day and negate the whole concept of a bottom.

However, the reason why today’s price action differs from prior days in this slow-motion crash is that we actually saw upside follow-through to a plethora of inverted hammers printed yesterday. Why so many inverted hammers yesterday? Because we closed right on the lows, so it makes sense that we would see plenty of those candles. Obviously, today’s finish has us looking candles that followed-though to the upside of those inverted hammers yesterday. There are also a bunch of other charts that printed hammers in their own right today, and of course they will need to confirm in the coming days. The key is that today’s lows hold, as things can become quite weak again quickly if they do not. Hence, the underlying bid will be truly put to the test here.

Below, you will find several examples of the mulit-punch combination of candles to shorts that I described.

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Source: ChartPorn.org

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Considering how far down we have fallen in a short amount of time, this morning’s rally is not overly impressive. To put it into perspective, we are barely back to, on the S&P 500, where we were before plundering in the final twenty minutes of yesterday’s session.  On the other hand, this is the first time in several weeks where I am seeing some actual upside  follow-through to the array of inverted hammers and dojis printed yesterday on many individual charts, such as VECO.

Naturally, given the ferocious move lower, plenty of traders doubt the credibility of this rally and are looking to put on some shorts at these levels. With the FOMC statement later today, the reaction by the market will be telling. From now until the announcement, though, I expect a bit of dead action, considering the dramatic reversal in the futures last night evening and spillover this morning.

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