Block and Tackle Time

How the Market Defends the Pullback is Critical

The Bulls had the ball since October 6th, but on October 12th the Bears took possession of the ball. It is the season to prepare for the year-end rally, which happens to line up with football season! Investors are wondering how strong that rally could be and the next few days will be a critical tell.

The Situation:

The market became short-term overbought, and we did have a pullback on high volume as the SPY found resistance at the 55 EMA (green moving average). The closing price was below the 8 EMA and 21 EMA which is a bad sign for momentum swing traders. It was above the 20 SMA, however, which is still bullish. The Slow Stochastics indicator is overbought so it is important to see how the market plays defense as the Bears have a chance to run prices down. On the bright side, the Money Flow Index is uptrending and above 50. The RSI is above 40, which is where pullbacks in uptrends tend to stop. The MACD made a bullish crossover in October, which is a signal that the followers of The Stock Traders Almanac look for to begin the year-end rally. The TTM Squeeze indicator is yellow and shows decreasing bearish momentum.

Best Case Scenario = The market goes sideways as it finds its way back above the 8 and 21 EMA. This would be a full-on bullish signal for momentum swing traders.

Using the Fibonacci Retracement technique, the pullback so far is a 38% retracement of the uptrend from the October bottom.

Not-So-Bad Scenario = There may be some more downside to go as there is a confluence zone at $428.75, where the 50% retracement meets the Anchored Volume Weighted Moving Average from the October bottom. A 50% retracement is completely normal for an uptrend.

There are key support levels at $425.82, $421.82, and $418.31. The October low was $420.18.

Weak Scenario = If the price breaks below the October low of $420.18, it would negate the early October uptrend.

This weak scenario could occur as the cycle brackets for SPY show a downtrend is possible until the cycle low point at 10/25.

This could play out as a lower leg of the downside channel that the market has been in since the July top. If this scenario happens, a good downside target is the Volume Profile Point of Control (POC) at $412, which aligns with the downtrend channel and the cycle bracket low of 10/25.

Looking at our cycles, we can see that the Energy Cycle may be the most attuned to the acute movements in the market. This cycle forecasts some downside starting around October 16th and note that the downside may have started a few days early. This weaker energy could last until October 24th, which lines up quite nicely with the cycle bracket low of October 25th.

First we have to see how the market plays defense against the oncoming bears. After that…we could get the elusive SWING TRADER’S MARKET (we’ll dive into this in the next Educational post).

Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.